SOUTH EAST ASIAN INSTITUTE OF TECHNOLOGY, INC.

Business Administration Department

National Highway, Crossing Rubber, Tupi, South Cotabato

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LEARNING MODULE FOR

BT 211
TAXATION (INCOME TAXATION)

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WEEK 9

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 COURSE OUTLINE

COURSE CODE : BT 211

TITLE : Taxation (Income Taxation)
TARGET POPULATION : BS Accounting Information System and BS Business
Administration major in Marketing Management Students
INSTRUCTOR : MRS. RUBY JOY FERNANDO-VERANO

Overview:

This course is an in-depth study of income and taxation where learners will have
their initial exposure to the Philippine income tax system. This introductory taxation
course is primarily concerned with income taxation. The objective of this course is to
develop a working knowledge on basic principles and rules of the income tax system in
the Philippines as they apply to individuals, partnerships, and corporations. It covers an
overview of the national tax system, and the income taxation of employees and
unincorporated business and incorporated business. It provides the students with
knowledge of the capital gains tax, final tax on certain passive income, and the year-end
tax including the minimum corporate income tax, the normal tax, and the improperly
accumulated income tax of corporations, and withholding tax.

Objectives:

CO 1: Understand the concept of law and the environment of the Philippine legal system
CO 2: Understand the remedies available to both the taxpayer and the BIR
CO 3: Understand the concepts and rules of the income tax on individuals
CO 4: Understand the concepts and rules of the income tax on corporations
CO 5: Understand the concepts and rules of the income tax on partnerships, estates and trusts
CO 6: Understand the concept of gross income
CO 7: Understand and identify deductible items from gross income
CO 8: Understand the bases in computing the taxable income
CO 9: Understand the taxation on sale, exchange, or other disposition of property

Instruction to the Learner:

Each chapter in this module contains a major lesson involving the theory and
practical application of the concepts of Income Taxation. The units are characterized by
continuity, and are arranged in such a manner that the present unit is related to the next
unit. For this reason, you are advised to read and understand this module. After each
unit, there are exercises to be given. Submission of task given will be every Wednesday
during your scheduled class hour.

The essential topics are thoroughly discussed starting in the following page.
Comprehension of these essential topics is enough for you to pass this course.
However, if you want to gain more insights on these essential topics, expanded
discussions and detailed explanations are provided in the appendices which can be
accessed in our Facebook group (see more details below).

At the end of each module, you can test your preliminary understanding by
answering the self-test questions. The answers to these questions are found at the
bottom part of the page. After answering the self-test questions, you are going to answer
the remaining bring-home questions and problems within the week while staying at
home, to be submitted by the next meeting, during your scheduled class hour.

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 WEEK 9

GROSS INCOME
Objectives:
After studying this chapter, the students should be able to

1. Define gross income and gross compensation income;

2. Enumerate and describe the classification of gross compensation;
3. Explain the tax exemption under the principle of convenience of the employer’s
rule;
4. Identify the different forms of dividend;
5. Distinguish prizes from winnings;
6. Classify the gross income from business.

GROSS INCOME
Gross income means the pertinent items of income referred to in Section32(A) of the tax
code. It includes all income from whatever source (unless exempt from tax by law)
including, but not limited to, the following items:

1. Compensation for services in whatever form paid including fees, salaries and wages,

Commissions, and similar items

2. Gross income derived from the conduct of trade or business or the exercise of a

profession

3. Gains from dealings in property

4. Interests

5. Rents

6. Royalties

7. Dividends

8. Annuities

9. Prizes and winnings

10. Pensions

11. Partners' distributive share from the net income of general professional partnership

Gross Compensation Income

Gross compensation income means any remuneration for rendering personal services.
Generally, compensation income is taxable, and it is obtained from an employer-
employee relationship between payor and recipient. The basis upon which the
remuneration is paid is immaterial in determining whether the remuneration constitutes
compensation. Thus, it may be paid on the basis of piecework, or a percentage of profits

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 and may be paid hourly, daily, weekly monthly or annually.

Exception
The compensation income including overtime pay, holiday pay, night shift
differential pay, and hazard pay, earned by Minimum wage earner are
nontaxable and not subject
To withholding tax on wages.

Classification of Gross Compensation Income

1. Basic salary or wage
Salary refers to earnings received periodically for a regular work other than manual
labor.
Wage are earnings received usually according to specified intervals of work, as by
the hour, day or week.
2. Honoraria are payments given in recognition for services performed for which
established practice discourages charging a fixed fee.
3. Fixed or Variable allowances these are allowances that are received by a public
and private entity officers or employees, in addition to the regular compensation
fixed for his position or office, and this is subject to withholding tax.
4. Commission is usually a percentage of total sales or on certain quota of sales
volume attained as part of incentives.
5. Fees are received by an employee for the services rendered to the employer
including director’s fee of the company, fees paid to the public officials.
Legal fees paid by the union on behalf of its president constitute compensation.
Marriage fee, baptismal offerings, sums paid for conducting masses for the dead, and
other contributions received by a clergy man, evangelist, or religious worker for service
rendered are considered compensation.

6. Tips and 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 income, but not subject to withholding tax.
7. Hazard or emergency pay. This is an additional payment received due to workers’
exposure to danger or harm while working.
8. Retirement pay refers to the lump sum payment received by an employee who
served a company for a considerable period of time and has decided to withdraw
from the work into privacy.
9. Separation pay is taxable if voluntarily availed of. It shall not be taxable if
involuntarily.
Examples of involuntary separation are:
a. Death
b. Sickness
c. Disability
d. Reorganization/merge of company
e. Company at the brink of bankruptcy

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 When a company is at the brink of bankruptcy, the sequence of satisfying the company’s
indebtedness should be in this order:

1. BIR
2. Employee
3. Creditors
10. Pension is stated allowance paid regularly to a person on his retirement or to his
dependents on his death, in consideration of past services, meritorious work, age,
loss, or injury. This is taxable if the law states or if the BIR approves the pension plan
of a private company.
11. Vacation and Sick leave

The following rules should be observed in determining whether money received for
vacation and sick leave is taxable or not.

a. If paid or availed paid or availed of as salary of an employee who is on vacation

or on sick leave notwithstanding his absence from work, it constitutes taxable
compensation income.
b. Monetized value of unutilized vacation leave credits of ten (10) days or less
which
were paid to private employees during the year are not subject to tax and to the
withholding tax.
c. Monetized value of vacation and sick leave credits paid to government officials
and employees are not subject to income tax and to the withholding tax.
12. Thirteenth month pay and other benefits as a general rule, thirteenth month pay
and other benefits are not taxable if the total amount received is P30,000 or less any
amount exceeding P30,000 is taxable.
13. Fringe benefits and de minimis. The Tax Code defines fringe benefits as “any
good, service or other benefit furnished or granted by the employer in cash or in kind,
in addition to basic salaries of an individual employee.
“De minimis” benefits are privileges of relatively small value as given by the employer
to his employees.

FRINGE BENEFIT TAX

FBT rate (old) FBT rate (new)
35% Resident or citizen 35% Resident or citizen

25% Non-resident Alien 25% Non-resident Alien

The following fringe benefits are not taxable:

a. Fringe benefits which are authorized and exempted from tax under special laws.
b. Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans.

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 c. Benefits given to the rank and file employees, whether granted under the
collectible bargaining agreement or not.
d. De minimis benefits

De minimis benefits which are exempt from income tax on compensation and from fringe
benefit tax:

a. Monetized unused vacation leave credits not exceeding 10 days during the year
b. Monetized value of vacation and sick leave credits paid to government officials
and employees
c. Medical cash allowance to dependents of employees not exceeding P1,500 per
employee per semester or P250 per month
d. Rice subsidy of P2,000 or 1 sack (50kg.) per month amounting to not more than
P2,000.
e. Uniforms and clothing allowance not exceeding of P6,000 per annum.
f. Actual medical benefits not exceeding P10,000 per annum
g. Laundry allowance not exceeding P300 per month
h. Employees achievement awards, eg. for the length of service, or safety
achievements, which must be in the form of a tangible personal property other
than cash or gift certificate, with an annul monetary value not exceeding P10,000
received by the employee under an established written plan which does not
discriminate in favor of highly paid employees.
i. Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000S per employee per annum.
j. Daily meal allowance for overtime work and night / graveyard shift not exceeding
25% of the basic minimum wage on a per region basis.
k. Benefits received by an employee by virtue of a collective Bargaining agreement
(CBA) and productivity incentive scheme provided that the total annual monetary
value received from both CBA and productivity incentive schemes combined, do
not exceed P10,000 per employee per taxable year.
14. Overtime Pay refers to premium payment received for working beyond regular
hours of work which is included in the computation of gross salary of the employee.
15. Profit Sharing is the proportionate share in the profits of the business received by
the employee in addition to his wages.
16. Awards for special services the amount received as an award for special services
of employee, or suggestions to employer resulting in the prevention of theft or
robbery.
17. Beneficial payments. Beneficial payments such as where an employer pays the
income tax owed by an employee are additional compensation
18. Other forms of Compensation. Other forms received due to service rendered are
compensation paid in kind.

GROSS INCOME FROM BUSINESS AND PROFESSION

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Business means any commercial activity engaged in as a means of livelihood or
profit of an individual or group of individuals.

Profession is primarily any endeavor or work requiring specialized training in the

field of learning, art or science engaged in as means of livelihood or profit of an
individual or group of individuals.

Gross income from business

a. Manufacturing
b. Merchandising or trading
c. Servicing
d. Farming
e. Long term contract

Illustration

Cabrero’s Store has just gone through its initial operation and provided the following
data to determine the gross income for the current year:

Sales P240,000
Merchandise inventory, end 20,000
Sales returns and allowances 10,000
Purchases 150,000
Sales discounts 30,000
Gains from sale of scrap materials 5,000

The gross income of Cabrero’s Store would be:

Sales, net of discounts, P30,000, return/allowances, P10 P200,000
Less: Cost of goods sold (P150,000 – P200,000) 130,000
Gross profit from sales P 70,000
Add: Gains from sale of scrap materials 5,000
Gross Income P 75,000

The Cost of Sales

Cost of goods sold shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use. The cost of sale is
deducted from the net sales to calculate gross income from business. Cost of sales of a
business may be classified as follows:

1. Cost of goods manufactured and sold of manufacturing concern.

2. Cost of goods sold of trading or merchandising concern
3. Cost of service of servicing concern

Cost of Goods Manufactured and Sold

For manufacturing business, “cost of goods manufactured and sold” shall include all
costs of finished goods that are sold such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

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Illustration

Assume the following data of Golden Fry Manufacturing:

Sales P6,100,000 Purchase discounts P 40,000

Sales Returns and allowances 100,000 Raw material’s insurance 50,000
Raw materials, beginning 200,000 Freight-in 80,000
Raw material purchases 3,600,000 Direct Labor 500,000
Raw materials, ending Raw materials, ending 210,000

Golden Fry’s gross income is computed as follows:

Sales P6,100,000
Less; Sales returns and allowances 100,000
Net Sales P6,000,000
Less: Cost of goods manufactured and sold:
Raw Materials used:
Raw materials, beginning P 200,000
Raw materials purchases 3,600,000
Raw materials insurance 50,000
Freight – in 80,000
Purchase discounts (40,000)
Raw materials, end (300,000) P 3,590,000
Direct labor 500,000
Manufacturing overhead 210,000 P4,300,000
Gross Income P 1,700,000

Cost of Goods Sold of Trading or Merchandising Concern

This refers to the invoice cost of the goods sold, plus import duties and freight incurred in
transporting the goods to the place where they are actually sold, including insurance
while the goods are in transit.

Illustration

Assume the following data of Diamond Grocery:

Sales P6,100,000 Purchase returns P 100,000

Sales Returns and allowances 60,000 Purchase Discounts 50,000
Sales Discounts 400,000 Freight-in 80,000
Inventory, Beginning 110,000 Inventory, beginning 300,000
Purchases 3,600,000 Insurance for goods
i n transit 60,000

Diamond Grocery’s gross income is computed as follows:

Sales P6,100,000
Less; Sales returns and allowances P 60,000
Sales discounts 40,000 100,000
Net Sales P6,000,000
Less: Cost of goods sold: P
Inventory, beginning P 110,000
purchases P3,600,000
Freight – in 80,000
Insurance for goods in transit 60,000
Purchase Returns (100,000)
Purchase Discounts ( 50,000)
Inventory, ending (300,000) P3,290,000 3,400,000
Gross Income P2,600,000

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RENTAL INCOME

Rental income refers to earnings derived from leasing real estate as well as personal
property

Rental Income governs by three rules

1. Prepaid rental. If the advance payment is a prepaid rental received without

restriction as to its used, the entire amount is taxable in the year it is received
whether the lessor uses cash or accrual method of accounting.
2. Security Deposit with Restriction. If the advance payment is a security deposit
which restricts the lessor as to its use, then such amount shoul be excluded in
the determination of rental income.
3. Security deposit with an acceleration clause. If the advance payment is a loan
deposit, or option money for the property, or a security deposit for the faithful
compliance of the lessee of the lease contract, such advance payment is not an
income to the lessor.

INCOME FROM LEASEHOLD IMPROVEMENTS

When the lessee erected or built permanent improvements on the leased property which
will become the property of the lessor upon the expiration of the lease, the value of the
improvements should be reported as income of the lessor using either outright method
or spread out method.

Two Methods of Income from Lease Improvements

1. Outright Method

Under this method, the income from leasehold improvement shall be recognized when
the improvement is completed at its fair market value.

2. Spread- out Method

Under this method, the estimated book value of the leasehold improvement at the end of
the lease is spread over the term of the lease and is reported as income for each year of
the lease an aliquot part thereof.

PASSIVE INCOME

Under section 24(B) of the Tax Code, a final tax is imposed upon gross passive income
of citizen and resident aliens. An income is said to be passive if the taxpayer merely
waits for it to be realized. Examples are:

1. Yield from deposit substitutes and trust fund

2. Interest income
3. Royalty income
4. Dividend income
5. Prizes and winnings

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Yield from Deposit Substitutes and Trust Fund

A deposit substitute is a debt instrument issued by the bank to borrow money from the
public other than from the client's deposit.

A trust fund is any estate, especially stock, securities, or money which is held in trust by
a person in behalf of another person.

Interest Income

Interest income Interest income is an earning derived from depositing or lending of

money, goods, or credits. Unless exempted by law, interest income received by the
taxpayer, whether or not usurious, is subject to income tax.

For individuals, except nonresident aliens not engaged in trade or business in the
Philippines, interest income from long-term deposit or investment (e.i., savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments) shall be exempt from income tax, provided that the
following conditions must be met:

1. The deposit or investment must be evidenced by certificates conforming to the

Bangko Sentral ng Pilipinas (BSP) prescribed form.
2. The same must have a maturity period of not less than five years and in
denominations of P10,000 or other denominations as may be approved by BSP
issued by banks.

However, should the holder of the certificate pre-terminate the deposit or investment
before the fifth year, a tax shall be imposed on the entire income and shall be
deducted and withheld by the depository bank from the proceeds of the long term
deposit or investment certificate based on the remaining maturity thereof, as follows:

 Final Tax of 15%...............................Four years to less than five years

 Final Tax of 12%...............................Three years to less than four years
 Final Tax of 20%...............................Less than three years

CLASSIFICATION OF INCOME

1. Exempt from income tax

2. Subject to final withholding tax
3. Subject to normal tax

Tax Exempt Interest Income

Interest earned is exempted from income tax if received from:

1. By members from a duly - registered cooperative

2. BSP prescribed form of investments maturing more than five years

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 3. Expanded foreign currency deposit system by nonresident citizens / aliens
4. A tenant who paid to a landowner on the price of land under a tenant-purchaser
agreement as part of CARP

Illustration

Mr. Matipid put his retirement pay in the following investments:

Interest
Investments: Per Year Amounts
BSP deposit substitute (more than 5 years) 18% P 200,000
Baguio – Benguet Cooperative 24% 200,000
Time deposit – China Bank(not BSP prescribed form) 7% 100,0000
Total Investments P500,000

The interest income not subject to income tax during the year would be:

Interest income – BSP deposit substitutes (P200,000 x 12%) P24,000

Interest income - Baguio – Benguet Cooperative (200,000 x 24%) 48,000
Total interest income not subject to tax P72,000

Accordingly, the only interest income subject to income tax (final tax of 20%) is the
income earned from tome deposit. The net interest earning of Mr. Matipid would be:

Total interest income not subject to tax P72,000

Add: interest income – China Bank (P100,000 x 7%) P 7,000
Less: Final tax on interest (7,000 x 20% 14,000 P 5,600
Total net interest earnings P 77,600

INTEREST INCOME SUBJECT TO FINAL WITHHOLDING TAX

Under the final withholding tax system. The amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from
the recipient of said income.

Withholding of creditable tax at source

Under the creditable withholding tax system, taxes withheld on certain payments are
intended to equal or at least approximate the tax due on the payee on the said income.

Sec. 57 (B) The secretary of finance may require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines by payor-
corporations/persons at the rate of 1% to 32% thereof, which shall be credited against
the income tax liability of the tax payer of the taxable year.

RA No. 10963 (New)

Beginning January 1, 2019, the rate of withholding shall not be less than 1% but not
more than 15% of the income payment.

Sec. 58 the return to final withholding tax shall be filed and the payment made within 25
days from the close of each calendar quarter.

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 The return of creditable withholding taxes shall be file and payment made not later
than the last day of the month following the close of the quarter during which the
withholding taxes was made.

The commissioner, with the approval of the secretary of finance, may require the
withholding agents to pay or deposit the taxes deducted or withheld at more frequent
intervals when necessary to protect the interest of the government.

The creditable withholding tax return shall be file and payments should be made
within 10 days after the end of each month except for taxes withheld for the month of
December of each year, which shall be filed on or before January 15 of the following
year.

The return of Final withholding tax shall be file and the payment made with in 10
days from the close of each month, except for taxes withheld for the month of December
of each year which shall be filed on or before January 15 of the following year.

RA No. 10963 (New)

The return for both final and creditable withholding taxes shall be filed and the
payments made not later than the last day of the month following the close of the quarter
during which the withholding was made or before the end of the next month.

The provision allowing the commissioner of Internal Revenue to adjust the

withholding of tax at more frequent interval is removed

Compliance Requirements

Statements t accompany income tax return

a. Financial Statements
b. Certificate of independent CPA duly accredited by the BIR (if the gross quarterly
sales, receipts or receipts exceed P150,000)
c. Statements of management responsibility
d. Certificate of income tax payments not subject to withholding rtax
e. Certificate of creditable tax withheld at source
f. Certificate of compensation payment or tax withheld

Taxpayers required to use the e-filling and e-payment system

a. Large taxpayers duly notified by the BIR

b. Top 20,000 private corporations duly notified by the BIR
c. Top 5,000 individual taxpayers duly notified by the BIR
d. Taxpayers who wishes to contract with government offices
e. Corporations with paid up capital stock of 10 million pesos
f. PEZA-registered entities and those located within the Special Economic Zones
g. Government offices, in so far as remittance of withheld VAT and business tax is
concerned.

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 Creditable Withholding Taxes

New Rate
Old Rate RR No. 11-
Nature of Income Payment 2018(Jan. 31,
2018)
1. Professionals If the current
year’s gross
2. Professional entertainers / athletes income does
3. Movie, stage, radio, television, and musical not exceed
P3,000-5%
directors (individual
4. Management and technical consultants If the current Payee)
year’s gross
5 Business and bookkeeping agents If the current
income does not years gross
6. Insurance agent income does
exceed
7. Payments for medical practitioners by a duly not exceed
P720,000 – P720,000 –
registered professional partnership 10% ;If it
10%; if it
exceeds
8. Payments for medical, dental and veterinary
exceeds P720,000 –
services thru hospitals, clinics or health 15%
P720,000 –
(Non-
organizations
15%. individual
9. Payment by a GPP to its partners payee)

10. Other recipients of talent fees

11. Rental of real of personal properties, poles,

satellites and transmission facilities and 5% 5%
billboards
12. Cinematographic film rentals 5% 5%
13. Contractors 2% 2%
14. Income distribution to beneficiaries of 15%
estates and trusts 15%

15. Gross commission of customs, stocks, real 10%

state, immigration and commercial brokers
Payment to government personnel from 15%
importers, shipping and airline companies
16. Payments made by credit card companies ½ 0f 1% 1%
17. Tolling fee paid to refineries 5% 5%
18. Income payments made to suppliers of
agricultural products 1% 1%

19. Income payments on purchases of

agricultural products 10% 5%

20. Income payments of purchases of gold by

BSP from gold miners and suppliers 10% 1%

INTEREST INCOME SUBJECT TO NORMAL TAX

These earnings These are earnings derived from lending money, goods or credits from

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one person to another without any withholding tax made. Since these interest earnings
are received in its total amount, they should be subject to normal tax of the taxpaye

Summary
Classification of Interest Income

Interest earnings received from:

*Cooperatives
*BSP prescribed form investments (more than 5 years)
*Expanded foreign currency deposit system earned by Tax
Nonresidents Exempt
*A tenant who paid interest to a landowner on the price
of the land under a tenant-purchaser agreement,
Interest Income
CARP

Interest earned from:

*Financial companies (20% FWT) Subject to
*Not BSP prescribed form investments (5%, 12%, 20% final
FWT)
*Expanded foreign currency deposit system earned by
withholding
residents (7.5% FWT) tax

Interest earned from:

*Principal Business activity Subject to
*Incidental interest earnings not subjected to final
withholding tax
normal tax

ROYALTY INCOME

A royalty income is a payment or portion of proceeds paid to the owner of a right, such
as an oil right or a patent for the use of tor a portion of the proceeds from the work of an
author composer

Summary of Tax on Dividends Income

Dividends are tax exempt:

*Received from domestic corporation by:
Tax Exempt - Another domestic corporation
- Resident Foreign Corporation
*Received from a cooperative
*Pure stock dividend
*Pure liquidating dividend ( return of capital

Dividends are subject to final tax if received from a domestic

corporation by a:
Subject to *Citizen or resident alien = 10% final tax
final Tax *Nonresident alien doing business in the Philippines = 20% final tax
*Nonresident alien not doing business in the Philippines = 25% final tax
*Nonresident Foreign Corporation = 15% Final withholding tax

Dividends are subject to year-end normal tax of individuals or

Subject to corporations if such dividends are:
*Not included as tax-exempt dividends
normal tax *Not subjected to final tax
*Distributive shares of partner in professional partnership
*Nonresident Foreign Corporation = 15% Final withholding tax

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 Forms and Valuations of Dividend Income
1. Cash dividend
2. Property dividend
3. Stock dividend
4. Scrip dividend
5. Indirect dividend
6. Liquidating dividend

Cash dividend is the most common form of dividend. It is valued and taxable to the
extent of amount of money received by the stockholder.

Property dividend is usually valued and taxable to the extent of the fair market value of
the property received at the time of declaration.

Stock dividend. As a general, rule pure stock dividends are not subject to tax because
they simply involve a transfer of the retained earnings to the paid-in capital account.

Scrip dividend is issued in the form of promissory note and is taxable to the extent of its
fair market value.

Indirect dividends are those other dividends representing payments or rights received
by the taxpayer, which are really dividends.

Liquidating dividend are return of stockholder investment. It arises from the distribution
of assets by a corporation to its stockholders upon corporate dissolution.

PRIZES AND WINNINGS

A Prize is a reward for a contest or a competition. It also represents remuneration for an

effort reflecting one’s superiority, like prize money of a boxing contest. This is subject to
final tax of 20% except if the amount of the prize is ten thousand (P10,000) or less which
shall be subjected to normal tax

A winning is a reward for an event that depends on chance such as winnings from
gambling, lottery or raffle ticket. This is subject to final tax of 20% regardless of amount.

OTHER SOURCES OF INCOME

These earnings are categorized as “other source of income” because they are generally
incidental earnings or not common source earnings. Usually, these incomes are, but not
limited to, the following:

1. Bad Debt recovery

2. Tax refund or credit
3. Damage recovery

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 4. Annuities
5. Income from whatever source

Tax benefit rule is a general principle in taxation which states that if a taxpayer
deducted an item on his income tax return and enjoyed a tax benefit ( reduced his
income tax) thereby, and in a subsequent year recovers all or part of that item, he will
recognize gross income in the year the deducted item is recovered.

Tax refund or credit

Tax refund is subject to the tax benefit rule which states that the refund of tax would only
be subjected to tax if such tax was previously deducted from gross income resulting in
the reduction of reported taxable income.

As a general rule, refunds from taxes paid are taxable except for the following:

a. Estate or donor’s tax

b. Philippine income tax
c. Stock transaction tax
d. VAT, claim as input tax

Damages Recovery is an amount received by an injured person as payment for loss

income or payment to compensate damage to property, injury to a person, or loss of life.
This is taxable.

Annuities are installment payments received for life insurance sold by insurance
companies. The annuity payments represent a part that is taxable and not taxable. If the
part of annuity payments represents interest, then it is taxable income. If the annuity is a
return of premium, it is not taxable.

Income from whatever sources defined this means inclusion of all income not
expressly exempted within the class of taxable income under the laws irrespective of the
voluntary or involuntary action of the taxpayer in the producing the gains, and whether
derived from legal sources or illegal sources.

Examples of income from legal source are:

1. Employee’s salary, bonus

2. Commissions / rebates of a medical representative

Examples of income from illegal sources are:

1. Gambling
2. Kidnapping
3. Extortion
4. Smuggling
5. Embezzlement

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Illegal Obtained Income

As a rule, illegal income is taxable. Income obtained through illegal means is included in
the wrongdoer’s gross income even though he is obligated to return it when discovered.

Embezzled Fund are income without consent (express or implied) with an obligation to
repay. If the embezzler reaps the fruit of his crime without restriction as to disposition, he
is in receipt of income though it may be claimed he is not entitled to the money and may
be adjudged liable to restore its equivalent.

Income Received by Error. When income is received under a mistake of a fact or law,
the income is included in the gross taxable income of the recipient may be required to
return the income item to the payor when the error is discovered.

Sources:

Llamado, C.P. & de Vera, J.L.A. (2019) – Philippine Income Tax Volume 1 (2019 Edition)
Naranjo, C.V.R. (2017) – General Principles of Taxation Review Material. SMARTS CPA Review, General Santos City
Rosada, F.U. (2018) – Notes in General Principles of Taxation Review Material. IRS CPA Review, Iloilo City and Leganes

End of Week 9

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 ACTIVITY OF WEEK 9

1. What is tax benefit rule?

2. Define tax credit.

3. What are the forms of Dividend Income?

4. What are the classification of gross compensation income?

5. What includes to gross income?

BT 211 : Taxation (Income Taxation)

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