Taxable and Gross Income: Concepts

Computation of Taxable Income

• Taxable income refers to pertinent gross income items, as specified in the tax code.
• Deductions are authorized for specific income types under the tax code or special laws.

Computation of Gross Income

• Gross income includes all income derived from any source, unless otherwise specified.
• Examples of gross income include compensation for services (fees, salaries, wages, commissions), income from trade/business or profession, gains from property dealings, interests, rents, royalties, dividends, annuities, prizes, pensions, and partner's share from general professional partnerships.

Exclusions from Gross Income

• Certain items are excluded from gross income and are exempt from taxation.
• Life insurance proceeds paid to heirs/beneficiaries upon the insured's death are excluded, except for interest payments if the insurer holds the amounts.
• Amounts received by the insured as a return of premiums under life insurance, endowment, or annuity contracts are excluded, whether during the term, at maturity, or upon surrender of the contract.
• Value of property acquired by gift, bequest, devise, or descent is excluded; however, income from such property is included in gross income, especially in cases of divided interest transfers.
• Compensation for injuries or sickness received through insurance or Workmen's Compensation Acts, plus damages for such injuries/sickness are excluded.
• Income exempt under any treaty obligation binding on the Philippine government is excluded.
• Retirement benefits received under Republic Act No. 7641 and from private firms' reasonable benefit plans are excluded, provided the employee has served for at least 10 years and is at least 50 years old at retirement, and the benefits are availed only once.
• A 'reasonable private benefit plan' includes pension, gratuity, stock bonus, or profit-sharing plans with employer contributions for employees' benefit, ensuring the fund's earnings are solely for the employees.
• Amounts received by an official/employee or heirs due to separation from service because of death, sickness, disability, or causes beyond their control are excluded.
• Social security benefits, retirement gratuities, pensions, and similar benefits received by resident/non-resident citizens or resident aliens from foreign government agencies/institutions are excluded, regardless of existing laws
• Benefit payments due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration are excluded.
• Benefits from the Social Security System under Republic Act No. 8282 are excluded.
• Benefits from the GSIS under Republic Act No. 8291, including retirement gratuity for government officials and employees, are excluded.

Miscellaneous Items Excluded from Gross Income

• Income derived by foreign governments from investments in the Philippines in loans, stocks, bonds, domestic securities, or bank deposits is excluded.
• This applies to foreign governments, financing institutions owned/controlled by foreign governments, and international/regional financial institutions established by foreign governments.
• Income derived by the Philippine government or its political subdivisions from any public utility or essential governmental function is excluded.
• Prizes and awards primarily recognizing religious, charitable, scientific, educational, artistic, literary, or civic achievement are excluded if the recipient did not take action to enter the contest and is not required to render future services.
• Prizes and awards granted to athletes in local/international sports competitions sanctioned by their national sports associations are excluded.
• 13th month pay and other benefits received by public/private employees are excluded, up to a total of P90,000.
• This includes benefits under Republic Act No. 6686, Presidential Decree No. 851, and other benefits like productivity incentives and Christmas bonuses.
• GSIS, SSS, Medicare, Pag-Ibig contributions, and union dues of individuals are excluded.
• Gains from the sale/exchange/retirement of bonds, debentures, or certificates of indebtedness with a maturity of more than five years are excluded.
• Gains realized by an investor upon redeeming shares of stock in a mutual fund company as defined in Section 22 (BB) of the tax code are excluded.
• Income derived from the sale of gold under Republic Act No. 7076, the "People's Small-scale Mining Act of 1991", is excluded for sales by registered small-scale miners to the Bangko Sentral ng Pilipinas or accredited traders.

Special Treatment of Fringe Benefits

• A final tax of 35% is imposed on the grossed-up monetary value of fringe benefits furnished by the employer to the employee, excluding rank and file employees, effective January 1, 2018.
• The employer pays the tax as per Section 57 (A) of the Tax Code, unless the benefit is required by the employer's trade/business/profession, or is for the employer's convenience.
• The grossed-up monetary value is determined by dividing the actual monetary value of the fringe benefit by 65% (effective January 1, 2018).
• Fringe benefits taxable under Subsections (B), (C), (D), and (E) of Section 25 are taxed at the rates imposed thereat.
• The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.
• Fringe benefit means any good, service, or benefit furnished by an employer to an individual employee (except rank and file employees), including housing, expense account, any kind of vehicle, and household personnel.

Fringe Benefits Not Taxable.

• Fringe benefits authorized and exempted from tax under special laws are not taxable.
• Employer contributions for the employee's retirement, insurance, and hospitalization benefit plans are not taxable.
• Benefits given to rank and file employees, whether granted under a collective bargaining agreement, are not taxable.
• De minimis benefits as defined in the rules and regulations promulgated by the Secretary of Finance, upon the Commissioner's recommendation, are not taxable.
• The Secretary of Finance is authorized to issue rules and regulations to implement these provisions, considering the nature of the trade, business, or profession.