tAX LESSON B .

B.
CONCEPTS OF INCOME
Learning Objectives. At the end of this module, students are expected to:
1. Define income for taxation purposes
2. Identify the inclusions in gross income;
3. Identify the taxable and non-taxable gross income;
4. Identify the classification of gross income for individuals
5. Identify the classification of gross income from business
6. Discuss the treatment of fringe benefits for taxation purposes.
7. Determine the taxability of passive income;
8. Identify the tax rates applicable to income subject to creditable withholding tax at
source and final taxes.
A. INDIVIDUAL
Income – refers to all earnings derived from:
 Rendered service (labor/employment)
 Capital (business or investment)
 Or both rendered service or business
 Gain derived from sale or exchange of personal or real property either ordinary
or capital asset
All income from whatever source, derived within and without the Philippines, legal
or illegal.
Sources of Income
 The place wherein the income is earned
 Governed by the situs of taxation
 Necessity to determine whether such income is subject to tax or not 
Income may be earned from:
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines
Classifications of Income for Individuals
1. Compensation income
2. Profession or Business Income
3. Passive Income
4. Capital Gain Taxable income
 These are pertinent items of gross income enumerated in the Tax Code less
deductions,
if any, and/or personal exemptions authorized by law.
 Amount of income upon which the tax rate prescribed by law is applied to
obtain the
amount of income tax payable
 Gains, profits or income which are subject to income either at gross or net
amount
Requisites for Income to be taxable
1. There must be gain or profit
2. The gain must be realized or received – whether actual realization or constructive
receipt
3. The income earned must not be exempted from income taxation
Taxable Income Defined. -The term ‘taxable income means the pertinent items of
gross income specified in this Code, less the deductions, if any, authorized for such
types of income by this
Code or other special laws.
Gross Income. - gross income are all income derived from whatever source,
including:
a. Compensation for services in whatever form paid, including, but not limited to
fees, salaries, wages, commissions, and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of a
profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends;
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner's distributive share from the net income of the general professional
partnership.
Exclusions from Gross Income. - The following items shall not be included in gross
Income: a.
Life Insurance. –
b. Amount Received by Insured as Return of Premium.
c. Gifts, Bequests, and Devises
d. Compensation for Injuries or Sickness. e. Income Exempt under Treaty.
f. Retirement Benefits, Pensions, Gratuities, etc.-
g. Miscellaneous Items. –
 Income Derived by Foreign Government
 Income Derived by the Government or its Political Subdivisions
 Prizes and Awards.
 Prizes and Awards in sports Competition.
 13th Month Pay and Other Benefits.
 GSIS, SSS, Medicare and Other Contributions. –
 Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness.

Gains from Redemption of Shares in Mutual Fund
Special Treatment of Fringe Benefit. -

Fringe Benefit Defined. –
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents; and
j. Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows.
Fringe Benefits 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;
c) Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
d) De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.
Taxable and Non-Taxable Gross Income
12Effective 1, 2018, compensation income earners, self-employed and professional
taxpayers
(SEPs) whose annual taxable incomes are P250,000 or less are exempt from the
personal
income tax (PIT). The 13th month pay and other benefits amounting to P90,000 are
also
taxexempt.
B. CORPORATE INCOME
Determination of Taxable Income
Domestic Corporation - taxable on the entire net income received from sources
within and
without the Philippines. Net taxable income is the amount equal to gross income less
allowable
deductions
Sources of Income:
1. Sale of Goods
2. Sale of Services
13Other Income
Dividends and Profit Remittances
• Dividends from a domestic corporation are tax-exempt in the hands of other
domestic
corporations. The tax is 10% if these are paid to citizens and residents, and 25% if
paid to non
resident foreign nationals not engaged in business in the Philippines.
• Dividends received by non-resident foreign corporations from domestic
corporations are
taxed at 30% or the treaty rate. A lower rate of 15% applies if the recipient’s home
country
does not impose a tax on foreign-sourced dividends or when there are taxsparing
provisions.
• A 15% tax rate also applies on the remittance of profits of Philippine branches to
their foreign
head office.
Interest and Royalties
• Royalties payable to non-resident foreign corporations are subject to the 30% final
withholding tax. A lower rate of 25% is imposed on non-resident foreign nationals.
• Interest on foreign loans paid to non-resident foreign corporations is taxed at 20%.
Preferential rates are available under tax treaties.
Other Passive Income
Scheduled rates apply on most passive income, including the following:
• Interest from bank deposits, yields from deposit substitutes and similar
arrangements,
royalties, prizes and other winnings from Philippine sources: 20%;
• Interest from foreign currency deposits in a local bank: 7.5% (non-residents are
exempt);
• Interest income from long-term deposits: individuals are exempt;
• Gains from the sale of shares listed and traded through the local exchange: exempt
from
income tax, but subject to a transaction tax at 0.5% of the selling price;
• Capital gains from the sale of land and buildings classified as capital assets: 6% of
the gross
selling price or market value, whichever is higher (not applicable to non-resident
foreign
individuals and corporations); and
• Capital gains from the sale of shares in a domestic corporation, not traded through
the local
stock exchange: 5% on the first P100,000 ($2120) of net gain and 10% on the excess,
imposed
on the cumulative net gain from the sale of shares during the taxable year. Gains
from the
surrender of shares on dissolution of the issuing company are taxed at the regular
corporate/individual tax rates.
Other Capital Assets
Gains from the sale or disposition of capital assets other than land, buildings and
shares in
domestic corporations are taxed as business income. For individuals, only 50% of the
gain is
taxed if the asset is held for more than 12 months. Capital losses are deductible only
to the
extent of the gains.
Deductions from Income– same as individual taxpayer except premium payments on
health and/or
hospitalization insurance
Withholding of Tax at Source
The withholding tax is a mechanism designed to facilitate the collection of taxes
from
taxpayers. The withholding tax may be creditable or final. If creditable, the amount
of tax
withheld is allowed to be credited against the taxpayer’s final tax liability and
adjusted
accordingly. If final, no such tax credit and adjustments are to be made by the
taxpayers.
Final Withholding Tax

What and When to File and Pay Final Withholding Tax?
Source: http://reliabooks.ph/final-withholding-tax-under-train-law/
• Commonly use BIR Form here are the 0619F, 1601FQ, and 1604CF.
• BIR Form No. 1600 is usually use by the Government to Withhold Final Withholding
VAT to their supplier.
• BIR Form No. 1602Q is usually use by the Banks.
• BIR Form 1603Q is use by Companies who give Fringe Benefits to its Employees
other than Rank and File
Income Payments to Individuals that are Subject to Final Withholding Tax (FWT).
Source: http://reliabooks.ph/final-withholding-tax-under-trainlaw/
Income Payments to Corporations that are Subject to Final Withholding Tax.

Income Payments on Interest Paid to Bank Deposits, Amount withdrawn on
Decedent’s Deposit Account, etc.
Income Payments from the Government that are Subject to Withholding of 5% to

12% VAT and 3% Percentage Tax.
Creditable Withholding Tax Rates on Certain Payments
The current and prior rates (before TRAIN Law) are listed below:
Activity No. 2 (answer in 1 WHOLE SHEET OF PAPER)

1. Explain what is a withholding tax?
2. What are the sources of income? Where it can be derived from?
3. Define each of the classifications of income.
4. What and When to File and Pay Final Withholding Tax?
5. How to determine taxable and non-taxable income?

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B.

Special Treatment of Fringe Benefit. -

Final Withholding Tax

Income Payments to Corporations that are Subject to Final Withholding Tax.

Income Payments from the Government that are Subject to Withholding of 5% to

Activity No. 2 (answer in 1 WHOLE SHEET OF PAPER)

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