Anda di halaman 1dari 29

A.

REASONS FOR EXCLUSION


Exclusion - refers to income received
or earned but is not taxable as income
because exempted by law or by treaty.
Such tax-free income is not to be
included in the income tax return
unless information regarding it is
specifically called for.
A. REASONS FOR EXCLUSION
1. The item of receipt does not fall within the
definition of income for income tax purposes.
Income in its broad sense, means all wealth
which flows into the taxpayer other than as a mere
return on capital. It includes the forms of income
specifically described as gains derived from sale or
other disposition of capital assets.

Damages recovered in libel and slander suits


Damages recovered for alienation of affection
Damages recovered for breach of promise to marry
Damages recovered for loss of life of spouse
Damages recovered in annulment of marriage
A. REASONS FOR EXCLUSION
2. A provision of the Tax Code or special
law exempts it from income tax.

This is expressly provided in The


National Internal Revenue Code of the
Philippines under Section 32, (B)
Exclusions from Gross Income.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance -
(life insurance policies). The proceeds
paid to beneficiaries upon the death of
the insured, whether in a single sum or
otherwise, but if such amounts are held
by the insurer under an agreement to pay
interest thereon, the interest payments
shall be included in gross income.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance

Reason: They are considered more


as an indemnity rather than
as gains or profits. The contract insurance is a
contract of indemnity.

Exception: Interest payments shall be


included in gross income if such amount is
held by the insurer under the agreement to
pay interest thereon.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance

However, proceeds of life insurance where the


beneficiary is revocable is subject to estate tax.
The exclusion from income taxation applies
regardless of who the beneficiary is, whether a
family member, or other individual, corporation
or partnership.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance

Case: El Oriente v. Posadas, 56 Phil. 147


Exclusion applies to group insurance, death
benefits under the Workmens Compensation
Insurance or under health or accident insurance
contract having the characteristics of life
insurance proceeds by reason of death.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance

Transfer of insurance contract amount


excludible should only be the amount or value of
actual consideration paid and the premiums paid
later by the transferee.

Where the consideration and premiums paid


exceed the proceeds, no amount is includible in
the gross income of the transferee.
B. EXCLUSIONS FROM GROSS INCOME
1. Proceeds of life insurance

Other tax implications of life insurance


proceeds:

A. Included in the gross estate:


Third person is revocably designated as beneficiary;
Estate, executor or administrator is designated as
beneficiary, revocable or irrevocable

B. Excluded from the gross estate: (2007 Bar)


Third person is irrevocably designated as beneficiary;
Proceeds of group insurance
B. EXCLUSIONS FROM GROSS INCOME
2. Amount received by insured as
return of premium. The amount
received by the insured, as a return of
premium or premiums paid by him under
life insurance, endowment, or annuity
contracts, either during the term or at the
maturity of the term mentioned in the
contract or upon the surrender of the
contract;
B. EXCLUSIONS FROM GROSS INCOME
2. Amount received by insured as
return of premium

Case: Com. V. Winslow, 113F [Ed.] 418.)


Cash surrender value of the policy is
also non-taxable. Return of premium
means a repayment of a part or the whole
of the premiums paid.
B. EXCLUSIONS FROM GROSS INCOME
2. Amount received by insured as return of
premium.

Reason: The return of premium amounts to a


return of capital.

Exception: Interest payments shall be


included in gross income if such amount is
held by the insurer under the agreement to pay
interest thereon.
B. EXCLUSIONS FROM GROSS INCOME
3. Gifts, bequests, and devises. The value of
property acquired by gift, bequest, devise, or
descent; but the income from such property as
well as gift, etc. of income from any property, in
cases of transfers of divided interest, shall be
included in gross income.
B. EXCLUSIONS FROM GROSS INCOME
3. Gifts, bequests, and devises.

Reason: They are subject either to estate tax or


donors tax.
B. EXCLUSIONS FROM GROSS INCOME
3. Gifts, bequests, and devises.

Gifts are subject to donors tax, whereas bequests


and devises are subject to estate tax (1994 Bar).
But the income from such property is taxable. If
the taxpayer inherits securities, the value of such
securities does not constitute income but the
dividends and interest paid on such securities
are taxable.
Principal paid under a marriage settlement and
alimony or allowance based on separation
agreement are considered as gifts.
B. EXCLUSIONS FROM GROSS INCOME
4. Compensation for injuries or
sickness Amounts received through
accident or health insurance or under
Workmens Compensation Act, as
compensation for personal injuries or
sickness, plus the amount of any damages
received whether by suit or agreement on
account of such injuries or sickness;
B. EXCLUSIONS FROM GROSS INCOME
4. Compensation for injuries or sickness

Damages recovered are taxable if the amount represents loss


of anticipated profits; not taxable if it represents a return of
capital or investment (BIR Ruling, September 8, 1954).
If the recovery represents damages for lost profits, it is
taxable as ordinary income (36 T.C. 1173 [1961], Federal
Income Taxation, Third Edition, Rose and Chommie, p. 24).
(2005 Bar)
Disability benefits paid under life insurance are also
excluded although the law refers to accidents and health
insurance. (Wong v Wing Non, 18TC 205, December 18,
1949).
B. EXCLUSIONS FROM GROSS INCOME
4. Compensation for injuries or sickness
Reason: Payment for such, adds nothing to the
individual, for the very concept which sanctions it,
prohibits that it shall include a profit. (see Lawkins
vs. Comm., 6 B.T.A. 1032.) In other words, any
damage rendered is compensatory, being payment
for the injuries or sickness sustained. The statutory
exemption extends to amounts received as moral
damages for personal injuries which are non-
physical in character like alienation of affection,
defamation or libel, and breach of promise to marry.
B. EXCLUSIONS FROM GROSS INCOME
5. Income exempt under treaty Income of
any kind, to the extent required by any treaty
obligation binding upon the government of the
Philippines;
B. EXCLUSIONS FROM GROSS INCOME
Income exempt under treaty

This is premised on our adherence to the generally


accepted principles of international law. In this
category, the following items of income are tax
exempt:

Income derived by the US Consular officials in the


Philippines in connection with such consular service
(USPI Consular Convention).

Income exempt under tax treaty with foreign


countries.
B. EXCLUSIONS FROM GROSS INCOME
6. Retirement benefits, pensions, gratuities,
etc., -
a. Retirement benefit received by officials and
employees of private firms, individuals or
corporations.
Requisites for exclusions:
1. Reasonable private plan maintained by employer duly approved by
the BIR for exclusive benefit of the members-employees;
2. Retiring official or employee who has rendered at least 10 years of
service;
3. At least 50 years of age at the time of the retirement;
4. The benefit of exclusion shall be availed of only once (Santos v.
Servier Philippines, Inc., 572 SCRA 487).
B. EXCLUSIONS FROM GROSS INCOME
6. Retirement benefits, pensions, gratuities,
etc., -
b. Retirement benefits paid to employees who have reached the age
of 60 or more but not beyond 65 years with at least five (5) years
of credited services.

c. Separation benefits due to death, sickness or other physical


disability or for any cause beyond the control of the said official
or employee.

d. Social Security benefits, retirement gratuities received by resident


or non-resident citizens or resident aliens from foreign
government agencies and other private or public institutions.
(2007 Bar)

Pensions received by retirees from foreign sources (BIR Ruling


B. EXCLUSIONS FROM GROSS INCOME
6. Retirement benefits, pensions, gratuities,
etc., -

e. Benefits received from US Veterans Administration (R.A. No. 360)


by veterans residing in the Philippines.

f. Payment of benefits under the Social Security System in


accordance with the provisions of R.A. No. 8282.

g. Benefits received from the GSIS under R.A. No. 8291 including
retirement guaranty.
B. EXCLUSIONS FROM GROSS INCOME
7. Miscellaneous Items -
a. Income received by foreign governments from their
investments in the Philippines.
Reason: To lessen the burden of foreign loans inasmuch as the
interest of these loans are, by contractual arrangement, borne by the
domestic borrowers. Foreign governments include financing
institutions owned, controlled and financed by them and
international or regional financing institutions established by
governments.

b. Income derived by the Government of the Philippines or


any political subdivision from any public utility or from the
exercise of any essential governmental function (e.g. income
derived by a municipality from the operation of a market or an
electric power plant) This is in recognition of the principle of
exemption from taxation of government agencies or entities.
B. EXCLUSIONS FROM GROSS INCOME
7. Miscellaneous Items -
c. Prizes and awards under the following conditions
(2000 Bar):
Received in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement.
Recipient was selected without any action on his part to enter the
contest or proceeding.
Recipient is not required to render substantial future services as a
condition to receiving the prize or award.

d. Prizes and awards in sports competition granted to athletes


whether held in the Philippines or abroad and sanctioned by
their national sports associations (1996, 2011 Bar).
B. EXCLUSIONS FROM GROSS INCOME
7. Miscellaneous Items -

e. 13th-month pay and other benefits:


Other benefits cover productivity incentives and Christmas bonus;
Total exclusion shall not exceed P82,000.00 (R.A. No. 10653).

f. GSIS, SSS, Medicare and other contributions.

g. Gains from the sale or exchange of retirement of


bonds, debentures, or other certificate of indebtedness
with a maturity or more than five (5) years.
B. EXCLUSIONS FROM GROSS INCOME
7. Miscellaneous Items -

h. Gains from redemption of shares in Mutual Fund Company.


Tax-exempt income under special laws/agreements

i. Prizes received in charity, horse racing, sweepstakes from the PCSO (R.A.
No. 1169)

ii. Salaries and stipend in dollars received by non-Filipino citizens serving as


staff of:

International Rice Research Institute (R.A. No. 2707);


Ford Foundation Grants (R.A. No. 3538);
Agricultural Department of the Southeast Asian Fisheries Development
Center (SEAFDEC) (P.D. No. 246);
Population Council of New York (P.D. No. 246).
B. EXCLUSIONS FROM GROSS INCOME
7. Miscellaneous Items -
iii. Income from bonds and securities:
For sale in the international market (P.D. No. 81);
Issue by EPZA (P.D. No. 66)

iv. Income derived from the installment sales of houses to their


employees and workers or to low-income groups in housing projects or
income derived from rentals thereof (P.D. Nos. 745 and 1217 Housing
Program of the government).

v. Officers and staff of Asian Development Bank (ADB), experts and


consultants performing missions for the Bank shall be exempt from
Philippine Income Tax. (Art. XII, Sec. 45, Government Agreement with
ADB)

vi. Awards given by the Ramon Magsaysay Award Foundation (RMAF)


are exempt from the payment of income tax. (R.A. No. 2062)