Department of Accounting Education Department of Accounting Education

Mabini Street, Tagum City Mabini Street, Tagum City

Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

(in kind)
Big Picture in Focus: ULOc. Master the components of C) services rendered at a In the absence of evidence to the contrary, the stipulate
Gross Income stipulated price price shall be presumed to be the fair market value (fmv

Examples of Payments in kind Taxable amount

payments in
Metalanguage A) Compensation paid to an employee Fair market value of the stock at the time re
kind
OF A CORPORATION IN ITS STOCK the employee
In this section, the most essential terms relevant to the study of curriculum
A) promissory note is not interest bearing
and to demonstrate ULOc will be operationally defined to establish a common frame B) promissory note and other evidence of
indebtedness in payment of services, and year received - fair discounted value
of refence as to how the texts work in your chosen field or career. You will encounter
not merely as security for such payment
year collected- face value less fair discounted value
these terms as we go through the study of taxation. Please refer to these definitions
in case you will encounter difficulty in the understanding educational concepts. B) Promissory note is interest bearing
YEAR RECEIVED -FACE VALUE

1. Gross Income. As defined in the Tax Code means all income derived from YEAR COLLECTED - MATURITY VALUE LESS FACE VALUE

whatever source including but not limited to the following:

1.1 Compensation Income
1.2 Business Income Personal and Equity Retirement Account (PERA) – refers to the voluntary
1.3 Gains derived from dealings in property retirement account established by and for the exclusive use and benefit of the
1.4 Interest Contributor for the purpose of being invested solely in PERA investment
1.5 Royalties products in the Philippines.
1.6 Dividends PERA contributions from employer do NOT form part of employee’s gross
1.7 Annuities income.
1.8 Prizes and winnings
1.9 Pensions Representation and Transportation Allowance (RATA)
1.10 Partner’s distributive share from the net income of a general professional Generally taxable as part of gross income. Exempt if:
partnership.  Expenses are ordinary and necessary in pursuit of trade or business;
and
I. Gross Income  Employee must account for the expense and liquidate with receipts and
other documents.
1.0 INCLUSIONS OF GROSS INCOME (CGGIRRDAPPP)
1.1.1 COMPENSATION INCOME RATA of government officials is considered reimbursement of expenses
Convenience of employer rule – allowances granted to an employee used and are therefore exempt. NO need to substantiate or liquidate.
for the benefit of the employer, and NOT for the employee’s personal benefit,
shall NOT be part of the employee’s income subject to tax. Additional Compensation Allowance (ACA) of government officials are
considered as “other benefits”. Hence, only the excess of P90,000 is subject
EXAMPLES All kinds of compensation for services rendered constitute gross income. They include: to tax.
OF
COMPENSAT A) Salaries, wages and fees; **TRAIN increased the non-taxable benefits to P90,000.
B) Commissions paid to salesmen;
ION FOR
C) Compensation for services on the basis of a percentage of profits;
SERVICES 1.1.2 GROSS INCOME FROM BUSINESS, TRADE AND PRACTICE OF
D) Commissions on insurance premiums;
RENDERED PROFESSION
E) Tips;
F) Pensions or retiring allowances paid by private persons or by the government
(except pension exempt from tax); and
G) Marriage fees, baptismal offerings, sums paid for saying masses for the dead, Format of Gross sales/receipts
and other contributions received by a clergyman, evangelist, or religious worker computation xxx
for services rendered. Less: sales returns and allowances xxx
FORMS OF Forms of compensation Taxable amount
COMPENSAT sales discount xxx xxx
ION A) payments made in cash The full amount received Net sales/receipts xxx
B) services paid for with The fair market value (fmv) of the thing taken in payment Less: cost of sales/services xxx
something other than money Gross income from operation xxx

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

Add: other income xxx tax non-residents (individuals or corporations);

Total gross income xxx B. Interest income from long-term deposit or investments
evidenced by certificates prescribed by Bangko
1.1.3 GAINS FROM DEALINGS IN PROPERTY Sentral ng Pilipinas.
Recognized when the property received in exchange is essentially different
from the property disposed and the property received has market value. Illustration: Jade has the following income in 2019:

A. Property Selling price xxx Interest income from loans 3, 000, 000
acquired by Less: cost xxx Interest income from deposits with other banks 400, 000
purchase on Gain xxx Interest income from notes rediscounting 100, 000
or after Interest income from treasury shares 50, 000
march 1,
1913. Only the interest income from loans and notes rediscounting are items of
B. Property Selling price xxx gross income subject to regular income tax. The interest on deposits and
acquired by Less: fmv, date of inheritance xxx treasury notes are items of gross income subject to final tax.
inheritance Gain xxx
1.1.5 RENTS
C. Property Selling price xxx Rents deposited by tenants in a bank because lessor refused to accept the
acquired by Less: value in the hands of the donor xxx same are included in lessor’s gross income. They are deemed constructively
gift Gain xxx received by lessor. (Limpan Investment Corp. v CIR)

1) Income of lessor under lease agreement

1.1.4 INTEREST
Payments made Lessor Lessee
Interest income subject to final tax are NOTincluded in the computation for
gross income. A. Rent Income Expense

A. Include Interest includes such interest arising from indebtedness, B. Obligation of

d in whether business or non-business. Unless exempted by law, lessor to third
Income Expense
interest interests received by a taxpayer, whether or not usurious, person paid by
income are taxable. lessee
B. Subject Interest income from philippine sources subject to final tax C. Advance rent Income in full in the year received Expense to be
to final (not included in the taxable net income subject to tax rates in regardless of accounting method prorated over
tax general) used the period
A. Interest from any currency bank deposit; covered
B. Yield or any other monetary benefit from deposit regardless of
substitute; accounting
C. Yield or any other monetary benefit from trust funds method
and similar arrangements;
D. Interest income received from a depository bank D. Leasehold Income reported under lump sum Expense
under expanded foreign currency deposit system; improvement or annual method (depreciation)
E. Interest income from long-term deposit or investment over the term
evidenced by certificates prescribed by Bangko of the lease or
Sentral ng Pilipinas if pre-terminated before fifth year. estimated life
C. exempt Interest income from Philippine sources exempt from tax: whichever is
from A. Interest income received from a depository bank shorter
income under expanded foreign currency deposit system by

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

2) Advance payment not representing rent Improvements by Lessee

 When lessee erects improvements per agreement with lessor, lessor may
A. Loan Advance payment representing loan to the lessor is
report the income:
not taxable unless applied to unpaid rent. o At the time the improvement is completed, the FMV of the
B. Security deposit Advance payment representing security deposit is improvement (outright method); or
not taxable unless violation in the lease contract o Spread out over the life of the lease the estimated depreciated
value of the improvement at the termination of lease. (spread out
arises.
method)
 If lease is terminated, so that the lessor comes into possession of the
property prior to the time originally fixed, lessor is considered to have
3) Leasehold improvement received additional income if the value of the improvement exceeds the
amount already reported as income.
A. Additional Leasehold improvement is a source of additional
 If improvement is destroyed before expiration of lease, lessor may deduct
income to the income to the lessor if it shall become his upon the
as loss the amount previously reported as income less any salvage value
lessor expiration of the lease. to the extent not compensated by insurance.
B. Recognition of (1) lump sum or outright method - lessor may  If useful life is less than remaining term of lease, lessor will NOT report
income from report as income, at the time when such buildings any income since he will get it fully depreciated.
leasehold or improvements are completed, the fair market
improvement value (fmv) of such buildings or improvements Prepaid rent – reported as taxable income in the year when prepayment is
subject to the lease. received.

Illustration1: Under the Iba Leasing Corporation’s standard lease contract,

lease shall run for a non-pre-terminable 12-month period at monthly rental of
(2) annual or spread out method
25, 000. The lessee shall pay three-month rent in advance plus one month
Cost of leasehold improvement xxx security deposit. The rent for the last two months of the lease shall be taken
Less: Acc. Dep. (remaining term of lease) xxx from the advance while the security deposits will be return if there are no
Book value, end of lease xxx damages sustained by the property during the lease term.
Annual income
The entire P75, 000 rental payments for the current month and the advanced
Book value, end of lease/remaining term of
rental for the last two months is an item of income subject to regular tax. The
lease xxx
P25, 000 security deposits is not an income.
(3) computation of income resulting from
premature termination of Lease
Illustration 2: In January 1, 2018, Covido leased a vacant lot to Nineteen
FMV of improvement when lessor took
under a 20 year lease contract. Covido immediately constructed a building on
possession xxx
the lot at a total cost of 4, 500, 000. The building has useful life of 30 years.
Less: amount already reported as income
xxx
Outright Method:
Income, year of termination
xxx
Under outright method, Covido shall recognize the entire 4, 500, 000 fair
C. Computation of
value of the improvement as gross income upon completion of the
loss due to Amount already reported as income xxx
improvement in 2018.
destruction of Less: insurance recovery xxx
leasehold Salvage value xxx xxx
improve-ment Loss xxx
before the term
of the lease
expires

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

Spread Out Method 1.1.7 DIVIDENDS

Cash and Property Dividends – taxable
The depreciation value of the property at the termination of the lease is the Stock Dividends – NOT taxable
value of the years of usage of the lessor. This can be computed by splitting o Except: Whereby the proportional interest of the SH after the
the value of the improvement as follows: distribution is essentially different from his former interest.

User Year of Usage Allocation Cost Sale of stock received as dividends

Lessee 20 years 20/30 x 4, 500, 000 3, 000, 000 Seller may realize gain or loss which is treated as capital asset. (Subject to
Lessor 10 years 10/30 x 4, 500, 000 1, 500, 000 CGT or STT)
4, 500, 000
Stock declaration and Subsequent redemption by Corporation
The 1, 500, 000 depreciated value of the improvement at the termination of The amount received shall be considered as taxable dividend. Subject to 10%
the lease is an income from leasehold improvement by the lessor. final tax. (RR 2-1940)

Under the spread-out method, Covido shall spread the 1, 500, 000 income Liquidating dividends – taxable
over 20 periods or recognized an annual income P75, 000 from the leasehold When a corporation distributes all its assets in complete liquidation, the gain
improvement from 2018 to 2037. realized from this is taxable as capital gains.
Such gain is the difference between the FMV of the liquidating dividends and
1.1.6 ROYALTIES the adjusted cost:
A. Subject to final Royalties earned in the PHI o If SH held his share for more than 12 months – only 50% of capital
tax gains is taxable
o If less than 12 months– 100% of the capital gains is taxable.
B. Subject to tax Royalties earned outside in the PHI
rates in general Dividend income (including shares in the net income of certain entities)
A. Difference between A direct dividend is one where the paying
direct and indirect corporation acknowledges that the distribution
Illustration 1: Flowersoftwares is a distributor of a computer program and
dividends is a dividend payment.
earns royalties from its licensed users. Computer programs are specifically
tailored to each client and regular continuing maintenance services are
An indirect dividend is a distribution of profits
provided. During the year, client-users remitted a total of 500, 000 royalty
disguised as payment of services, properties,
payments.
etc.
B. Dividends/shares in a. Cash and/or property dividends
The entire 500, 000 is subject income tax since the royalty is an active income
net income subject actually or constructively received by
(basic income) to Flowersoftwares.
to final tax individuals from domestic corporation
or from a joint stock company,
Illustration 2: Mang Dammy has the following royalties:
insurance or mutual fund company and
Royalties from mining properties in the Philippines 550, 000
regional operating headquarters of
Royalties from books published in the Philippines 200, 000
multinationals;
Royalties from books published abroad 300, 000
b. Inter-corporate dividends received from
Royalties from franchise exercise abroad 400, 000
domestic corporation by non-resident
foreign corporations;
The royalties from mining properties and from books in the Philippines is
c. Share of an individual in the
subject to final tax. The royalties from sources abroad aggregating P700, 000
distributable net income after tax of a
are items of gross income subject to regular income tax. Remember that the
partnership (other than a general
withholding tax inherently do not apply to foreign income.
professional partnership) of which he is
a partner;
d. Share of an individual in the net

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

income after tax of an association, a annuity

joint account, or a joint venture or C. Taxable annuity Excess of the amount returned as premium
consortium taxable as a corporation of
which he is a member or co- venturer.
C. Dividends/shares in a. Dividends from foreign corporations; Illustration: Andrew purchased an annuity contract for P100, 000 which shall
net income subject b. Share in the net income of a general pay him P10, 000 annually until he dies.
to tax rates in professional partnership.
general The receipt of the first 10 annual annuity payments is a return of capital. Any
D. dividends that are A. Inter-corporate dividends received from further receipt from year 11 and onward is an item of gross income subject to
exempt from tax domestic corporation by other domestic regular income tax.
corporation and resident foreign
corporation. 1.1.9 PRIZES AND WINNINGS
Generally taxable.
Illustration Except:
Caloocan Corporation, a domestic corporation, received cash dividends from 1. If the recipient was selected without any action on his part and was
the following corporations: NOT required to render substantial future services as a condition for
receiving the prize or award;
Domestic corporation P 400, 000 2. Those granted to athletes in local and international sports competitions
Resident foreign corporations 200, 000 sanctioned by the National Sports Association; and
Non-resident foreign corporations 300, 000 3. Those in the nature of gifts.

The P400, 000 inter-corporate dividends declared by a domestic corporation A. Subject to tax rates in a. Prizes and winnings from foreign
is exempted from final tax. Therefore, it is not an item of gross income subject general sources received by individuals
to regular income tax. and corporations;
b. Prizes and winnings from
The P500, 000 total dividends from the resident and non-resident foreign Philippine sources received by
corporations are items of regular income subject to regular income tax and corporations;
shall be reported as follows: c. Prizes from Philippines sources
received by individuals amounting
Scenario 1: Assuming Caloocan Corporation is a domestic corporation, the to P10,000 or less.
P500, 000 total dividends from foreign corporations shall be included in gross B. Subject to final tax a. Prizes received by individuals from
income because domestic corporation are taxable on world income. Philippine sources [except prizes
amounting to P10,000 or less
Scenario 2: Assuming Caloocan Corporation is a resident foreign which shall be subject to tax under
corporation, only a portion of the P200, 000 dividends from the resident Sec. 24 (A)];
foreign corporation determined as earned with by the Pre-dominance test b. Other winnings of individuals from
discussed in Chapter 3 shall be included in gross income. Note that the situs Philippine sources (except
of dividends from the non-resident foreign corporation is abroad. Philippine Charity sweepstakes
and Lotto winnings)
1.1.8 ANNUITIES C. Exempt/excludedfrom a. Philippine Charity sweepstakes
Sum of money payable at regular intervals. gross income and Lotto winnings (Amended by
 Life insurance annuities are excluded from gross income. TRAIN LAW);
b. Prizes and awards made primarily
A. Meaning of An annuity is a specified income payable at stated in recognition of achievements in
annuity intervals for a fixed or a contingent period, often for the following fields:
the recipient’s life, in consideration of a stipulated 1. Religious;
premium paid either in prior installment payments 2. Scientific;
or in a single payment. 3. Artistic;
B. Non-taxable Annuity representing return of premium 4. Civic.

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

5. Charitable; o Moral and actual damages – NOT taxable

6. Educational;  However, moral damages NOT arising from physical
7. Literary; injuries are taxable as income. (Murphy v Internal
Revenue Service)
Conditions for the exemption of prizes and  Refunds
awards: Taxes paid in connection with taxpayer’s business or profession, that were
1. The recipient was selected without previously claimed and allowed as deductions but were subsequently
any action on his part to enter the refunded or granted as tax credit shall be included as part of gross income to
contest or proceedings; and the extent of the income tax benefit.
2. The recipient is not required to Except:
render substantial future services o Estate and donor’s tax
as a condition to receiving the o Income, war-profit and excess profit taxes imposed by a foreign
prize or award. country
3. All prizes and awards granted to o Taxes assessed against local benefits tending to increase the value
athletes to local and international of property assessed
sports competitions and o Stock transaction tax
tournaments whether held in the o Taxes NOT allowable as deductions under the law.
Philippines or abroad and
sanctioned by their national sports
 Cash deposits or advances received by taxpayers (except GPP) from
association.
clients and customers shall form part of gross receipts.
 Income or gain derived from exercise of stock options is considered
Illustration
additional income and subject to income tax.
The City of Baguio held its Panagbenga flower festival. During the festivities, o Additional compensation – the difference in the book value or
Mr. Erorita, the proprietor of Mr. Sexy Body Gym, won the P500, 000 second FMV of the share the time of the exercise of stock option and
prize in the flower float competition. John Hay Management Corporation won the price fixed on the grant date.
the P600, 000 first prize.
2.0 EXCLUSIONS FROM GROSS INCOME (LAGCIRMM) (Sec. 32B)
The City of Baguio shall withhold 20% final tax on the winnings of Mr. Erorita.
The prize of John Hay Management Corporation shall not be subjected to a 2.1 LIFE INSURANCE PROCEEDS
20% final tax but to creditable withholding tax. John Hay shall include the Except: if the proceeds are held by the insurer under an agreement to pay
prize in its gross income subject to regular income tax. interest thereon. The interest payments shall be included in gross income.

1.1.10 PENSIONS Proceeds of life Insurance

Pensions and retirement benefits under R.A. 7641 are excluded from gross 1) Proceeds of life Proceeds of life insurance policies paid to the heirs
income. insurance policies or beneficiaries upon the death of the insured,
excluded from gross whether in a single sum or otherwise are excluded
1.1.11 PARTNER’S DISTRIBUTIVE SHARE IN GPP’S INCOME income from gross income.
2) Interest on proceeds is If such proceeds are held by the insurer under an
Each partner shall report as gross income his distributive share in the net included in the gross agreement to pay interest thereon, the interest
income of the GPP. income payment shall be included in the gross income.

1.1.12 INCOME FROM WHATEVER SOURCE

Illustration: (CPA Exam) Mr. J. Cruz insured his life with his estate as beneficiary.
 Just compensation received from government for the expropriation of
In 2019, after Mr. Cruz had paid P65,000 in premiums, he assigned the policy to
private properties should be included in the gross income. This is
Mr. S. Santos for P60,000, and Mr. Santos collected the total proceeds of
embraced within the meaning of “sale or disposition of property”.
P200,000. Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid
 Damages, depends:
total premiums of P80,000.
o Compensation for loss of income and exemplary damages –
taxable
Compute for the following:

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

a. Exempted amount; 2) Amounts of any damages received, whether

b. The taxable amount. by suit or agreement on account of such
injuries or sickness.
2.2 AMOUNT RECEIVED AS RETURN OF PREMIUM 2) Recoveries of certain Recoveries of damages, representing
damages compensation for personal injuries arising from
Amount received by insured as return of premium libel, defamation, slander, breach of promise to
1) Excluded return of The amount received by the insured, as a return marry, alienation of affection are not subject to
premium of premium paid by him under life insurance, income tax and shall not be included in gross
endowment, or annuity contracts, either during income.
the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract. 2.5 INCOME EXEMPT UNDER ANY TREATY
2) Excess of premium If the amounts, when added to amounts
returned shall be received before the taxable year under such 1) Excluded income Income of any kind to the extent required by any
included in gross income contract, exceed the aggregate premium paid, treaty obligation binding upon the Government
whether or not paid during the taxable year, then of the Philippines is exempt from taxation.
the excess shall be included in gross income 2) Examples of income 1) Salaries of officials of the United Nations
3) Excluded amount in case In the case of a transfer for a valuable exempt under treaty assigned in the Philippines if paid by the
of consideration by assignment or otherwise, of a United Nations and certified by the Secretary
a transfer for a valuable life insurance, endowment or annuity contract or General of the United Nations;
consideration by any interest therein, only the actual value of 2) Salaries, allowances, fees, or wages received
assignment or otherwise, such consideration and the amount of the by citizens of the United States of America
of life insurance premiums and the sums subsequently paid by working in consular offices in the Philippines
the transferee are exempt from taxation. are exempt from all taxes;
4) Participating dividends Participating dividends are not income to the 3) Salaries of diplomatic officials and agents.
insured. They are treated as return of capital.
2.6 RETRIREMENT BENEFITS, PENSIONS, GRATUITIES ETC.
2.3 GIFTS, BEQUESTS, AND DEVISES
Except: Income from such property. 1) Retirement benefits Retirement benefits received under R.A No. 7641
1) Subject to transfer taxes Gifts, bequests and devises are subject to received under R.A No. and those received by officials and employees of
transfer taxes (estate tax or donor’s tax.) 7641 and those private firms whether individual or corporate in
2) Income from transferred Income from property derived from its received by officials and accordance with a reasonable private pension
properties included in investment, sale or otherwise shall be included employees of private plan maintained by the employer.
gross income in the gross income. firms 1) The retiring official or employee has been in
3) Gift, bequest, devise or Gift, bequest, devise or descent of income from the service of the same employer for at least
descent of income any property, in cases of transfers of divided 10 years and is not less than 50 years of
included in gross income interest, shall be included in the gross income. age at the time of his retirement;
4) Alimony or an allowance Neither alimony nor an allowance based on a
based on a separation separation agreement is taxable income. The benefits granted shall be availed of by an
agreement official or employee only once.
2) Any amount received by Any amount received by an official or employee of
2.4 COMPENSATION FOR PERSONAL INJURIES AND SICKNESS an official or employee by his heirs from the employer as a consequence
Including amount of damages received on account of such. as a consequence of of separation of such official or employee from the
separation service of the employer because of death,
sickness or physical disability or for any cause
1) Excluded compensation The following compensation for injuries or
beyond the control of the said official or
for injuries or sickness sickness shall not be included in the gross
employee is not included in the gross income
income:
3) Social security benefits, The provisions of any existing law to the contrary
1) Amounts received through Accident or
retirement gratuities, notwithstanding, social security benefits,
Health Insurance or Under Workmen’s
pensions and other retirement gratuities, pensions and other similar
Compensation Act;

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 Department of Accounting Education Department of Accounting Education
Mabini Street, Tagum City Mabini Street, Tagum City
Davao del Norte Davao del Norte
Telefax: (084) 655-9591, Local 116 Telefax: (084) 655-9591, Local 116

similar benefits received benefits received from foreign government Philippines or abroad and sanctioned by their
from foreign government agencies and other institutions, private or public national sports association.
agencies and other by resident or nonresident citizen of the 3) 13th month and other Gross benefits received by officials and
institutions, private or Philippines or aliens who come to reside benefits employees of public and private entities provided
public permanently in the Philippines are not included in that the total exemption shall not exceed
the gross income. P90,000.
4) United States Veterans Payments of benefits due or to become due 4) GSIS, SSS, Medicare and GSIS, SSS, Medicare and Pag-IBIG
Administration benefits under United States Veterans Administration are Pag-ibig contributions, contributions, and union dues of individuals shall
not included in the gross income and union dues not be included in gross income.
5) Social Security System Benefits received from or enjoyed under the 5) Gains realized a) Gains realized from the sale or exchange or
(SSS) benefits Social Security System (SSS) are not included in retirement of bonds debentures or other
the gross income. certificate of indebtedness with a maturity of
6) Government Service Benefits received from the GSIS including more than 5 years shall not be included in
Insurance System (GSIS) retirement gratuity received by government the gross income.
benefits officials and employees are not included in the b) Gains realized by the investor upon
gross income. redemption of shares of stock in a mutual
fund company.
2.7 MISCELLANEOUS TAX-EXEMPT ITEMS
Note: Mutual fund company is an open-end
1) Income derived by a) Income derived by foreign governments, and close-end investment company.
Governments financing institutions owned, controlled or
enjoying refinancing from foreign governments, Illustration: A rank and file employee received the following benefits from his
and international or regional financial employer:
institutions established by foreign governments
13th month pay
from investment in loans, stocks, bonds or
P20,000
other domestics securities, or from interest
14th month pay
on deposits in banks in the Philippines.
20,000
b) Income accruing to the Government of the
Christmas bonus
Philippines derived from any public utility or
10,000
from the exercise of any essential government
Productivity incentives
functions.
15,000
2) Prizes and awards a) Prizes and awards made primarily in
Total 13th month and other benefits
recognition of achievements in the
P65,000
following fields:
1) Religious; 3) Scientific; 5)
Artistic; 7) Civic. How much was the taxable benefits?
2) Charitable; 4) Educational; 6)
Literary;
Illustration:The following were received by a resident citizen employee, married,
Conditions for the exemption of prizes and
awards: and with four (4) qualified dependent children for the year 2011: Salary (net of
a. The recipient was selected without any P20,000 withholding tax; P3,000 SSS contribution; P2,000 union dues),
action on his part to enter the contest or P275,000; 13th month pay, P25,000; 14th month pay, P25,000.
proceedings; and
How much was the taxable compensation income?
b. The recipient is not required to render
substantial future services as a condition to Illustration: Based on the following data compute the total of exclusions from gross
receiving the prize or award. income:
b) All prizes and awards granted to athletes to
local and international sports competitions Salary, gross of withholding tax P480,000
and tournaments whether held in the Allowance 20,000

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Thirteenth month pay 20,000

Christmas bonus 20,000
Reimbursement for transportation expenses 5,000
Payroll deductions:
SSS contributions 4,000
Philhealth contributions 3,000
Pag-IBIG contributions 2,400
Loan payment 20,000

Self Help: You can also refer to the sources below to help
you further understand the lesson.

Ampongan, O. (2015). CPA Reviewer in taxation. Manila: Conanan Educational

Supply.

Ballada, W., & Ballada, S. (2019). Income taxation: made easy (17th ed.).
Philippines: DomDane Publishers & Made Easy Books.

Valencia, E., & Roxas, G. (2016). Income taxation: Principles and laws with
accounting application. Baguio: Valencia Educational Supply.

Let’s Check

Activity 1. Now that you have understood matters regarding Gross Income, let us
try to check your understanding. Determine whether the statement is True or False.

1. In general, the situs of the income whether within the Philippines, without the
Philippines, is determined by the place where the service is rendered.
2. Source of income is either within the Philippines, without the Philippines or
partly within and partly without the Philippines.
3. Pensions are taxable to the extent of the amount received expect if there is an
approved pension plan by the Bureau of International Revenue.
4. Prizes and awards granted to athletes in local and international sports
competitions and tournaments held in the Philippines or abroad and
sanctioned by their national sports associations are not exempt from income
tax.
5. Compensation from damages if its represents payment for loss of expected
profits are taxable but compensatory damages constituting returns of capital
are not taxable.

Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of taxation
principles is not enough, what also matters is you should also be able to explain its
concepts. Now, I will require you to explain thoroughly your answers.

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