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MSJG TAX 1 Chap 4

Mar Sean Jan Gabiosa

Chapter Notes
Income Taxation 7th edition Valencia and Roxas
Chapter 4 Gross Income
Gross Income means all income from whatever source (unless exempt from tax). It
includes a catch-all clause (from whatever source) to supplement the enumeration
by including any non-enumerative items which can properly defined as income
Gross compensation income means any remuneration for rendering personal
services.
Minimum Wage Earners (MWE) overtime pay, holiday pay, hazard pay, etc, are
nontaxable wages.
Employer-employee relationship exists when a person has the right to control and
direct an individual who perform services.
Compensation income is not deducted by business and personal expenses.
The rule of compensation income applies only within the Philippines
Classification of Gross Compensation Income
Basic salary or wage
Honoraria
Fixed or variable allowance
Commission
Tips and gratuities
Hazard or emergency pay
Retirement pay
Separation pay
Pension
Vacation and sick leave
13th month pay
Fringe benefits and de minimis
Overtime pay
Profit Sharing
Awards for special services
Beneficial payments
Other forms of compensation
The fair market value of stock at the time of service is the basis of tax.
Grant of stock options:
a) If no payment is required for such grant of options, the employer cannot
claim deduction (for tax) for the grant of option.
b) If the option was granted for a price, the full consideration shall be subject
to capital gains tax. Any excess shall be subject also.
Cancellation of debt

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a) When a creditor without any consideration cancels the debt, the debt is a
gift, not an income of debtor.
b) When a corporation forgives a debt of a stockholder, the effect is payment
of a dividend income to debtor.
c) When a debtor partly performs a service then the debt is cancelled, the
extent of the services performed is realized as income.
Taxability and deductibility of Life insurance Premium paid by the employer
Beneficiary
Taxable income of employee
Deductible expense of employer

Employee
Yes
Yes

Employer
No
No

Income tax paid by employer in favor of the employee, the basis of tax is the tax
paid.
If living quarters or meals are furnished to an employee for the convenience of the
employer, the value thereof need not to be included as part of compensation
income.
Casual labor means labor which is occasional, incidental or regular.
Any remuneration paid for casual labor (should be in the course of employers trade
and business) is considered compensation.
Any remuneration paid for casual labor performed for a corporation is considered
compensation.
Business means any commercial activity engaged in as a means of livelihood or
profit of an individual or group.
For tax purpose, profession is primarily any endeavor or work requiring specialized
training in the field of learning, art, or science engaged in as a means of livelihood
or profit.
In general, a practice or profession is a service business.
Gross income is to business
Gross receipts is to service business
Cost of Service shall include only direct costs and expenses necessarily incurred to
provide the services required.
Gross revenues derived only by telegraph and cable services within the Philippines
shall be included in the taxable gross income.
Leasing is a service business, therefore the rule for advance payments received by
the lessor is presumed income and the whole amount is taxable in the year it is
received.
Leasehold improvements erected by the lessee which upon expiration will still
become the property of the lessor, is an income of the lessor:
a) Outright Method income is recognized when the improvement is
completed at its fair value.

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b) Spread-Out method income is computed by spreading out the book value

(Cost minus Accumulated depreciation at the end of the lease) of improvement over
the year of the lease.
Passive Income
Income is passive if the taxpayer merely waits for it to be realized. Final tax is
imposed upon this income.
Deposit substitute is a debt instrument issued by the bank to borrow money other
than clients deposits
Interest income received by taxpayer, unless exempted by law, whether or not
usurious, is subject to final tax.
Interest income from long-term deposit or investment shall be exempted from
income tax, provided:
a) Conform to BSP certificates prescribed form; and
b) Must have maturity period of not less than 5 years, and with denomination
requirements by BSP.
However, if certificate of deposit or investment is pre-terminated before 5 th
year period elapsed, final tax is imposed on the entire amount.
Interest income on Expanded Foreign Currency Deposit (EFCD) is subject to 50% of
7.5% final withholding tax
Interest income on deposits made in banking institutions are [already] subjected to
final withholding tax of 20%.
Interest income from lending, which is the main course of business, is subject to
normal tax.
Royalty income:
a) 20% final tax; for natural resources, franchise products, and other similar
products; or
b) 10% final tax; for literary works, musical composition.
Dividend income
Tax exempt
a) Received from a Domestic Corporation by: Another domestic
corporation
Resident foreign corporation
b) Received from a Cooperative
c) Pure stock dividend
d) Liquidating dividend
Tax sparing rule is a inter-corporate dividend, where dividend received by a
nonresident foreign corporation from a domestic corporation is subject to 15% final
withholding tax provided that the foreign law allows taxpayer clause; otherwise it
will be subject to normal domestic rate of 30%.
Form of Dividend income
Cash dividend 10% final tax

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MSJG TAX 1 Chap 4

Property dividend extent of FMV of property received at the time of

declaration
Merchandise inventory
Shares of stock of another corporation
Treasury stock
Stock dividend pure stock dividends are exempt
Scrip dividend only face amount is taxable
Indirect Dividend forgiveness of debt from a corporation means payment of
dividend income.
Liquidating dividend any excess of liquidating dividend over cost of shares
surrendered is subject to tax. If it is a loss, it is deductible.
Prizes and winnings
Prizes is a reward for a contest or competition.
a) Final tax of 20%; or
b) Normal tax if 10,000 or less than.
Winnings reward for an event that depends on chance.
a) Final tax of 20% regardless of amount.
For tax purpose, bad debts are considered the amounts of receivable worthless and
to be written off.
Recovery of such bad debts means recovery of the taxable amount written off.
Tax refund is subject to tax benefit rule, which states that the refund would only be
subjected to tax if such tax was previously deducted from gross income.
If the tax paid was taxable, tax refund will be deductible. As if the tax paid was
deductible, tax refund will be taxable.
Recoveries from compensation of loss of profit are taxable.
Recoveries for damages are not taxable when it represents compensation for
damages to property, injury or loss of life.
Annuity interest is taxable. Annuitys return of premium is not taxable.
Illegal income is taxable.
Embezzled income is taxable in the part of embezzler, unless paid back.
Income received under mistake is taxable.