Income

- Incremental wealth coming to a person, whether natural or juridical, other than as a return of
investment
- Main sources: payment for services or interest/ profit from investment and gains from dealings in
property
- Other sources: damages
- Need not necessarily be in the form of cash
- Not all receipts constitute income

Sources of income

- Labor (compensation income or income from business or practice of profession)

- Use of capital
- Sale or exchange of capital assessment

Gross Income- Compensation

- Compensation- remuneration for services performed by an employee for his employer unless
specifically excluded by the code
- principal form: salaries, wages, commissions, fee
- supplemental form: allowances (usually of a fixed amount), fringe benefits received by rank and
file employees, hazard pay, 13th month pay, bonuses

Minimum Wage Earners

- worker in the private sector paid the statutory minimum wage or an employee in the public sector
with compensation income not more than the statutory minimum wage in the agricultural sector
- Income exempt from payment of income tax on their taxable income, including holiday pay,
overtime pay, night shift differential and hazard pay

Gross Income Compensation

Differentiate compensation income from:

- Those given for the convenience of employer;

- De minimis benefits and
- Fringe benefits

Those required by the nature of or necessary to the trade and business and those granted for the
convenience or advantage of the employer

- Not taxable to the employee

Those required by the nature of or necessary to the trade and business and those granted for the
convenience or advantage of the employer
 - Not taxable to the employee
- Deductible as a business expense to the employer

De minimis benefits

- Exempt from FBT (Rev. Regulation No 3-98, as amended)

- Not considered items of income, hence, exempt from income tax and withholding tax

What are considered de minimis benefits?

- Monetized leave credits of government employees; monetized VL not exceeding 10 days during
the year for private sector employees
- Rice subsidy of P1,500 or one sack of rice per month amounting to not more than P1,500

Some more de minimis:

- Actual yearly medical benefits not exceeding P10,000 per annum

- Medical cash allowance to dependents of employees not exceeding P750 per employee per
semester or P125 per month
- Employees achievement awards in the form of a tangible personal property other than cash or gift
certificate with value not exceeding P10,000
- Flowers, books, fruits, other items given to employees under special xxx

If de minimis benefits paid exceed the ceilings in the regulations…

Excess shall be lumped with other benefits which are taxable if the total exceeds P30,000
pursuant to – Sec. 32 (B)(7)(e) of the NIRC

Fringe Benefits

Goods, services or other benefits furnished or granted, in cash or in kind, by an employer to an individual
employee (except rank and file) such as:

 Housing
 Expense account
 Vehicle of any kind
 Services of Household personnel
 Interest-free loans/lower than market rate interest
 Membership fees
 Expenses for foreign travel
 Holiday & vacation expenses
 Educational assistance
 Life or health insurance in excess of what the law allows
Exclusions:

 Those required by the nature of or necessary to the trade and business

 Those granted for the convenience or advantage of the employer
 Those granted to rank and file employees
 Employer’s contribution to retirement insurance and hospitalization benefit plan
Fringe Benefit Tax

-grossed up monetary value (“GMV”) of fringe benefit (actual monetary value/(1-applicable FBT rate)) x
FBT rate

FBT rates: Generally 35%

Exceptionally: 25%

-deductability for the employer: GMV

Withholding is authorized under…

 Final Withholding Tax – Sec. 57(A), NIRC

 Expanded/Creditable Withholding Tax – Sec. 57 (B), NIRC

Situs of Compensation Income

 Place of performance of Service

 What about the location of payor of income?
 Secondment

GROSS INCOME FROM CONDUCT OF TRADE OR BUSINESS

Individual

 Subject to scheduler tax rates

Corporatons

 Regular 3% income tax rate

 MCIT
 15% Gross income taxation

Optional standard deduction of up to 40% under Sec 34 (L)

GROSS INCOME – GAINS FROM DEALINGS IN PROPERTY

Ordinary Assets Include:

 Stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer in on hand at the close of the taxable year
 Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business
 Property used in the trade or business of a character which is subject to the allwance for
depreciation provided in Subsection (F) of Sec 34
 Real property used in trade or business of the taxpayer
Ordinary assets: those used in trade or business

 Actual gains subject to income tax

Capital assets: those not used in trade or business

 (Sec 39, NIRC)

 Real property – 6% presumed gains subject to tax
 “tax-free” exchangers under Sec 40 (c) (2)
 Shares of stock
o Traded in the exchange – 0.6% stock transfer tax
o Not traded in the exchange – actual gains subject to tax (15%) Sections 24C, 25A3, 27 D2,
28 A7c