Definition of Terms: GROSS INCOME: Classification of Taxpayers, Compensation Income, and Business Income

GROSS INCOME: Classification of Taxpayers, Compensation Income, and Business Income
General Rule: All taxpayers whether individual or corporate are subject to income tax, unless specially exempted by
special laws. Individual taxpayers are either: (a) subject to graduated rates, (b) subject to preferential rate, or (c) both.
DEFINITION OF TERMS
The following terms are defined under the Revenue Regulation No. 8 – 2018, in accordance with the Republic Act No.
10963 otherwise known as the ‘Tax Reform for Acceleration and Inclusion (TRAIN)’ Act:
Compensation Income – in general, means all remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless specifically excluded by the Code. The name by which
the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and
honoraria, allowances, commissions (e.g. transporation, representation, entertainment and the like);
fees including director's fees, if the director is, at the same time, an employee of the employer-
corporation; taxable bonuses and fringe benefits, except those which are subject to the fringe benefits
tax under Sec. 33 of the Code and the allowable "de minimis" benefits; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation income.
Corporate Taxpayers – any artificial being created by operation of law; they include corporations, partnerships,
joint ventures, joint-stock companies, joint accounts (cuentas en participacion), associations, and
insurance companies. (Corporate income taxation is discussed thoroughly on separate module.)
Employee – an individual performing services under an employer-employee relationship. The term covers all
employees, including officers and employees,whether elected or appointed, of the Government of the
Philippines, or any political subdivision thereof or any agency or instrumentality.
Employer – any person for whom an individual performs or performed any service, whatever nature under an
employer-employee relationship. It is not necessary that services be continuing at the time the wages
are paid in order that the status employer may exist. Thus, for purposes of withholding, a person for
whom an individual has performed past services and from whom he is still receiving compensation is an
"employer".
Employer and Employee Relationship – exists when a person for whom services were performed (employer) has the
right to control and direct an individual who performs the services (employee), not only as to the result
of the work to be accomplished but also as to the details, methods and means by which it is accomplished.
An employee is subject to the control of the employer not only as to what shall be done, but how it shall
be done. It is not necessary that the employer actually exercises the right to direct or control the manner
in which the services are performed. It is sufficient that there exists a right to control the manner of doing
the work.
Fringe Benefits – means any good, service or other benefit furnished or granted in cash or in kind other than the
basic compensation, by an employer to an individual employee (except rank and file empioyee as defined
herein). (See discussions on fringe benefits.)
Gross Receipts – refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with
the services, and deposits and advance payments actually or constructively received during the taxable
period for the services performed or to bi performed for another person, except returnable security
deposits for purposes of these regulations. In the case of VAT taxpayer, this shall exclude the VAT
component.
Gross Sales – refers to the total sales transactions net of VAT, if applicable, reported during the period, without any
other deduction. However, gross sales subject to the 8% income tax rate option shall be net of the
following deductions:
a. Sales returns and allowances for which a proper credit or refund was made during the month or
quarter to the buyer for sales previously recorded as taxable saies; and
b. Discounts determined and granted at the time of sale, which are expressiy indicated in the
invoice, the amount thereof forming part of the gross sales duly recorded in the books of
accounts. Sales discount indicated in the invoice at the time of sale, the grant of which is not
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Sources: National Internal Revenue Code of 1997, Republic Act No. 10963 otherwise known as the Tax Reform Acceleration and Inclusion (TRAIN), Republic Act
No. 9504, Revenue Regulation No. 8 – 2018, Philippine Constitution of 1987
dependent upon the happening of a future event, may be exciuded from the gross saies within
the same monthiquarter it was given.
Individual Taxpayers – any natural person earning taxable income from employment, self-employment or those
considered as passive incomes. However, for income taxation purposes, unsettled estates earning
incomes and trusts are taxed in the same manner as individual taxpayers.
Minimum Wage Earner (MWE) – refers to a worker in the private sector who is paid with a stututory minimum wage
(SMW) rates, or to an employee in the public sector with compensition income of not more than the
statutory minimum wage rates in the non-agricultural sector where the worker employee is assigned.
Such statutory minimum wage rates are exempted from income tax.
Mixed Income Earner – an individual earning compensation income from employment, and income from business,
practice of profession and/or other sources aside from employment.
Non-resident alien engaged in trade and business (NRAETB) – refers to a non-resident alien who shall come to the
Philippines and stay for an aggregate period of more than one hundred eighty (180) days during any
calendar year.
Non-resident alien not engaged in trade and business (NRANETB) – refers to a nonresident alien who shall come to the
Philippines and stay for an aggregate period of one hundred eighty (180) days or less during any caiendar
year'
Rank and File Employee – refers to an employee holding neither managerial nor supervisory position as defined
under existing provisions of the Labor Code of the Phiiippines, as amended.
Self-Employed – a sole proprietor or an independent contractor who reports income earned from self-employment.
He/she controls who his/her works for, how the work is done and when it is done. lt includes those hired
under a contract of service or job order, and professionals whose income is derived purely from the
practice of profession and not under an employer - employee relationship.
Taxable Income – is the net income subject to income tax after deducting allowable deductions and exemptions from
the gross income.
VAT Threshold – refers to the ceiling fixed by law to determine VAT registrable taxpayers. The VAT threshold is
currentiy set at three million pesos (P3,000,000.00), and the same shall be used to determine the income
tax liability of self-employed individuals and/or professionals under Sections 24(AX2Xb) and 24(A)(2)(c)(2)
of the Tax Code, as amended.
INTRODUCTION TO INCOME TAXATION

In the accounting context, income is defined as the increases in the economic benefits during the accounting period
in the form of inflows or enhancements of assets, or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants [IAS F 4.25(a)]. Simply stated, income is an increase in
the equity or capital during the period other than capital contributions made by the owner or stockholders.
According to Black’s Law Dictionary, income is the return in money from one’s business, labor, or capital invested.
“Return” means the money or value derived from the use of money or capital invested. It is the gain derived from the
use of capital money, from labor or effort, or both combined, including profit or gain through sale or conversion of
capital.
Some would often interchangeably use income and revenue to mean “earnings”, but for accountants, income means
the ‘bottom-line’, or the figure appearing in the bottom line of the income statement after deducting all expenses
from the gross income. This bottomline is conventionally referred to as the ‘net profit’. On the other hand, revenue
means the total yield before deducting the necessary costs and expenses to derive such yield. Technically, it refers to
the sales figure appearing in the uppermost line of the income statement. Other people also call revenue as the
“turnover”.
However, for income taxation purposes, an income is described as a return on the capital, rather than the return of
the capital itself. In other words, it it the excess of money or money’s worth received for the capital used.
The above discussion can be illustrated as:
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Total Receipts or Turnover Total money returned

(Capital or Investment)_ Return of Capital
Income Return on Capital
Income Tax System
An income tax is a tax on annual profits arising from the use of property, trades, and offices (Fisher v. Trinidad, 43
Phil. 981). It is a national tax on the net or the gross income realized by the taxpayer in a taxable year. Like any other
national internal revenue taxes, it is also an excise tax such that, it is imposed upon the right or privilege of a person
to earn income. Being an excise tax, the object of taxation in income tax is the privilege or right of the person, and
not the person itself, nor the property or properties generating such income.
The money derived from income taxes contribute large amounts of needed funds, and is an increasing dependable
source of revenue to the government. The income tax levied using progressive rates has become considered as the
best measure of the ability to pay, consistent with the Theoretical Justice or Equality Principle (Domondon, 2013).
CLASSIFICATION OF INDIVIDUAL TAXPAYERS AND THEIR SITUS

The taxpayer’s residence and citizenship must be identified to properly account incomes which are subject to income
tax. The situs of taxation depends on the taxpayer’s residency and citizenship, thus careful analysis must be made.
1. Resident Citizen (RC)

A resident citizen is someone who is both a citizen and a resident of the Philippines. To qualify for citizenship, one
must have met the following requirements as prescribed by the Philippine Constitution of 1987:
o Those who are citizens of the Philippines at the time of the adoption of the Philippine Constitution in 1987;
o Those whose fathers or mothers are citizens of the Philippines;
o Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the
age of majority; and
o Those who are naturalized in accordance with law
A resident is he who maintains his residence in the Philippines for a long period of time. A resident citizen is
taxable globally for their sources of income (within and outside the Philippines). Hence, wherever his income may
come from, he will be always subject to income tax.
2. Non-resident Citizen (NRC)

A non-resident citizen is someone:
o Who establishes to the satisfaction of the CIR the fact of their physical presence abroad with a definite
intention to reside therein;
o Who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis; or
o Who stays outside the Philippines for more than 183 days.
Either of the above, the taxpayer is considered a non-resident citizen. And as such, they are taxable only for their
income earned within the Philippines. Incomes earned outside the Philippines are not taxable under the
Philippine tax code.
A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the Philippines.
Overseas Contract Workers (OCWs). They are Filipino citizens employed in foreign countries who are physically
present in a foreign country as a consequence of their employment thereat. To be considered as an OCW or OFW,
he or she must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a
valid Overseas Employment Certificate (OEC). OFWs are also considered as non-resident citizen.
3. Resident Alien (RA)

Resident aliens are foreign persons who have acquired residency in the Philippines. As a general rule, foreign
persons are considered as residents when length of stay or assignments are indefinite or exceeding two (2) years
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(BIR Rulings Nos. 051-81 and 052-81). Like non-resident citizens, they are also taxed for incomes derived within
the Philippines only. Incomes derived abroad are not subject to Philippine taxation.
4. Non-resident Alien Engaged in Trade or Business (NRAETB)

A nonresident alien individual is a foreign person who have not acquired residency in the Philippines. Any foreign
person who shall come in the Philippines and stay herein for an aggregate period of more than 180 days during
any calendar year shall be deemed as doing business in the Philippines. Like the non-resident citizen and resident
aliens, this taxpayer is also taxed for his/her incomes derived within the Philippines only.
5. Non-resident Alien Not Engaged in Trade or Business (NRANETB)

Any foreign person who shall come in the Philippines and stay herein for an aggregate period of not more than
180 days during any calendar year shall be deemed as not doing business in the Philippines. They are taxable for
incomes derived within the Philippines only at 25% of the total gross income.
6. Special Taxpayer
Any Filipino or foreign individual employed, either holding a managerial or supervisory position, or a rank-and
file, in any of the following:
a. Multinational Company which is a foreign firm or entity engaged in international trade with an
established branch in the Philippines as follows:
o Regional or Area Headquarter (RAHQ) – an office whose purpose is to act as an administrative branch
of a multinational company engaged in international trade which principally serves as a supervision,
communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific
region and other foreign markets, and which does not earn nor derive income in the Philippines.
o Regional Operating Headquarter (ROHQ) – a foreign business entity which is allowed to derive income
in the Philippines by performing qualifying services to its subsidiaries, branches or affiliates in the
Philippines, in the Asia-Pacific region and other foreign markets.
b. Offshore Banking Units (OBUs)
c. Petroleum contractor or subcontractor
Filipino and foreign individuals employed in any of the three above shall now be subject to graduated tax like resident
citizens and resident aliens.
Previously, they enjoy a preferential tax treatment of 15% for all their gross compensation income derived from
employment. However, on December 19, 2017 when the Republic Act No. 10963 otherwise known as the TRAIN Law,
a proviso in the TRAIN was vetoed by the president, this veto pertains to the preferential tax previously granted to
special taxpayers.
Situs of Taxation
Source of Income
Taxpayer
Within the Philippines Outside the Philippines
Taxable (Graduated Rates or 8% Taxable (Graduated Rates or 8%
Resident Citizen
Preferential Rate) Preferential Rate)
Taxable (Graduated Rates or 8%
Non-resident Citizen Non-taxable
Preferential Rate)
Taxable (Graduated Rates or 8%
Resident Alien Non-taxable
Preferential Rate)
Non-resident Alien Engaged Taxable (Graduated Rates or 8%
Non-taxable
in Trade or Business Preferential Rate)
Non-resident Alien Note Taxable at 25% of the total Gross
Non-taxable
Engaged in Trade or Business Income
Income tax follows two fundamental principles, to wit:

1. Residence-based Taxation – Residents are taxed on income earned from within and outside the Philippines.
2. Source-based Taxation – Non-residents are taxed on the territory or source of the income.
Married individuals shall compute their individual income tax based on their respective total taxable income. Any
income which cannot be definitely attributed or identified as income exclusively earned or realized by either of the
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spouses, the same shall be divided equally between the spouses for the purpose of determining their respective
taxable income.
Minimum wage earners (MWE) shall be exempt from the payment of income tax on their taxable income (Sec. 24 [2]).
Under Revenue Regulation No. 8 – 2018, taxable income for compensation earners is the gross compensation income
less non-taxable income or benefits such as but not limited to the Thirteenth (13th) month pay and other benefits
(subject to limitations), de minimis benefits, and employee's share in the SSS, GSIS, PHIC, Pag-ibig contributions and
union dues. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by minimum wage earners
shall also be exempt from income tax. (Republic Act No. 9504)
Senior Citizens are also exempt from the payment of individual income taxes if they are considered as minimum wage
earner. A senior citizen is resident citizen of the Philippines who is at least 60 years old. Apart from the exemption in
income tax, they shall also enjoy the benefits and privileges granted by the Republic Act No. 9994 otherwise known
as the Expanded Senior Citizen Act of 2010.
Example 4:
Richard, a Chinese national, arrived in the Philippines on January 1, 2017 to visit his Filipina paramour. He planned to
stay in the country until December 31, 2017, by which time he would go back to his legal wife and family in China. He
derived income during his stay here in the Philippines. For the taxable year 2018, how shall Richard be classified?
Answer: He as a resident alien because his intention to stay (definite) is only until December 31, 2017. If stays beyond
that date, he shall be considered as resident because the intention becomes indefinite. However, in 2017, he shall be
considered as non-resident alien engaged in trade.
Example 5:
Manolo, a retired American soldier, has been staying in the Philippines since his marriage to a Filipina five years ago.
He has established his business here with their children studying at a local university. His close friend residing in San
Diego, California, USA, borrowed $3,000 from X of which an additional $500 interest was paid to X upon due date of
the loan. How should Manolo be taxed?
Answer: Manolo is considered as resident alien, thus taxable for incomes derived in the Philippines only. The situs of
the interest earned from the loan receivable is outside the Philippines, the debtor being situated in San Diego,
California, USA. Therefore, Manolo is not subject to income tax for the interest income earned.
INCLUSIONS TO GROSS INCOME

Before computing income tax, it is necessary to identify first the items included in the gross income. These items are:
(1) compensation income, (2) business and professional incomes; (3) passive income; and, (4) capital gains.
Compensation Income
In general, compensation income means all remuneration for services performed by an employee for his employer
under an employer-employee relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is immaterial. Examples of compensation income:
salaries, wages, , allowances, (e.g. transpofiation, representation, entefiainment and the like); taxable bonuses and
fringe benefits, except those which are subject to the fringe benefits tax under Sec. 33 of the Code and the allowable
"de minimis" benefits; taxable pensions and retirement pay; and other income of a similar nature constitute
compensation iucome. (RR 8 – 2018, Sec 2)
The following formula may be usefule in computing the gross income of a purely compensation income earner
taxpayer:
Annualized compensation income (salary and wages, and others) xxx

Add: Bonuses and other benefits xxx
Total gross compensation Income xxx
Less: Non-taxable Compensation Income
13th Month Pay and Other Benefits subject to limit of P 90,000 (xxx)
Compensation income subject to tax xxx
Less: Mandatory Deductions and Statutory Exemptions (xxx)
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Taxable Compensation Income xxx
The following are examples of compensation income:

1. Salaries and wages – A salary is a fixed compensation paid regularly, while a wage is a payment for the labor or
service on an hourly, daily, or a piecework basis.
2. Bonuses and Other Benefits – These are compensation paid for by the employer to the employees in addition to
the usual or regular basic pay. These include, but not limited to, 13th month pay, midyear bonuses, productivity
incentives, and other bonuses and benefits. These bonuses and other benefits shall be subject to P 90,000 limit,
such that, if the total amount exceeds the limit, only such excess will be taxable. Otherwise, the total amount
shall not be subject to tax.
3. Holiday Pay, Overtime Pay, Night Shift Differential Pay, and Hazard Pay – These are taxable income subject to
withholding tax on compensation. However, if these income payments are made to a minimum wage earner,
such income are not taxable.
4. Allowances – These include the following:

a. Representation And Transportation Allowance (RATA). In general, fixed or variable transportation,
representation and other allowances which are received by a public officer or employee of a private entity,
in addition to the regular compensation fixed for his position or office, is compensation subject to
withholding. For private employees, it's generally taxable as part of their gross compensation income. It is,
however, exempt from tax if the following conditions are present:
o The allowance given is ordinary and necessary in the pursuit of trade, business or profession.
o The employee is required to account or liquidate for the said expenses.
The excess of the actual payments over the advances are taxable if they're not returned to the owner. Also,
reasonable amounts of reimbursements or advances computed daily and paid to the employee while on
assignment/duty don't need to be subjected to substantiation requirements and withholding.
b. Personal Economic Relief Allowance (PERA). The RATA and PERA are generally taxable. However,
Representation and travel allowance (RATA) granted to public officers and employees under the General
Appropriations Act (GAA) and the personal economic relief program (PERA) which essentially constitute
reimbursement for expenses incurred in the performance of government personnel’s official duties shall not
be subject to income tax and consequently to withholding tax.
c. Additional Compensation Allowance (ACA). These allowances are treated as "other benefits" together with
the Christmas bonus, 13th month pay and productivity incentives. Therefore, the excess of the P 90,000 limit
is taxable as part of income tax.
d. Living Quarters or Meals Allowances. If furnished to an employee for the convenience of the employer, the
value thereof need not be included as part of compensation income.
e. Facilities and Privileges of a relatively small value (De Minimis). Generally not considered as compensation
subject to withholding if offered or furnished merely as a means of promoting health, goodwill, contentment,
or efficiency of employees. (Also discussed under de minimis benefits).
f. Vacation and Sick Leave Allowance. Though the employee is absent, such constitute compensation. However,
the monetized value of unutilized vacation leave credits of ten days or less which were paid to the employee
during the year are not subject to income tax and to the withholding tax. (Also discussed under de minimis
benefits).
Any amount paid specifically, either as advances or reimbursements for traveling, representation and other
bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee
in the performance of his duties are not compensation subject to withholding. The excess advances over
actual expenses shall constitute taxable income if not returned to the employer. Allowances which are not
part of the regular compensation income, and which are not exempted from tax shall be considered as “Other
Benefits” subject to P 90,000 threshold limit.
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5. Tips and Gratuities – Tips or gratuities paid directly to an employee by a customer of the employer which are not
accounted for by the employee to the employer are considered as taxable income but not subject to withholding.
6. Honoraria and other Emoluments – Honoraria are payments given for professional services that are rendered
nominally without charge. Honoraria and other emoluments shall be considered as compensation income subject
to income tax.
7. Commissions – A commission is an amount of money, typically a set percentage of the value involved, paid to an
agent in a commercial transaction. It is a form of compensation payment for service rendered, and as such,
subject to income tax.
8. Retirement pay and similar remunerations – These are compensation payments made by the employer upon the
retirement of the employee. In general, these payments are exempted from tax, provided such payments meet
the following requirements:
o The employee is at least 50 years old at the time of retirement;
o The employee has rendered 10 years in the same company;
o The employee availed it for the first time; and
o Such private benefit plan is approved by the BIR.
9. Separation Pay – Payments made to employee upon resignation or separation shall be generally taxable. However,
if the cause of such separation is involuntary such as in the case of death, severe illness resulting to resignation,
and accident among others, separation pay paid to the employee or to the family of the deceased employee (in
the case of death) shall be exempted from income tax.
10. Proceeds of Life Insurance – Proceeds of life insurance paid to the bereaved family or to any beneficiary of the
deceased employee shall be exempted from income tax because such payment is a compensation for the life lost.
However, if the employee survives the insurance policy, any proceeds paid to him as a return of the premiums
paid by him shall be exempted from income because return of the premiums paid is regarded as just the return
of the capital invested by him. But, excess of proceeds over the cumulative premiums paid shall be taxable.
11. Fees including director's fees, if the director is, at the same time, an employee of the employer corporation.
Every income is generally taxable, unless, specifically exempted by the law and the requirements to be exempted are
met. The situs or place of compensation income is where the services are rendered regardless of the residence of
payor (Sec. 155, RR 02-40).
Example 5:
Danny, a resident of Cebu, is employed as the head accountant of X Company. During the year 2018, he had the
following data pertaining to his income:
Monthly Basic Salary P 29,000

Midyear bonus 20,000
13th Month Pay 29,000
Productivity Bonus received during Christmas 25,000
SSS Monthly Contribution 1,000
PhilHealth Insurance Monthly Contributions 100
Housing Development and Mutual Fund (HDMF) Monthly Contribution 200
Monthly premiums paid on Health and Hospitalization Insurance 3,000
Personal, family and living expenses 200,000
Compute the taxable compensation income of Danny.
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Solutions:
In computing the taxable compensation income, remember to multiply the monthly figures by twelve (12) months
since income tax is computed on annual basis.
Monthly Basic Salary (P 29,000 x 12) P 348,000

Midyear bonus 20,000
Productivity Bonus received during Christmas 25,000
Total Compensation Income P 422,000
Less: Non-Taxable Compensation
Midyear bonus P 20,000
Productivity Bonus 25,000
Total Bonuses and Other Benefits P 74,000 ( 74,000)
Threshold limit P 90,000 ________
Compensation income subject to tax P 348,000
Less: Mandatory Deductions (Exemptions from tax)
SSS Monthly Contribution P 1,000
PhilHealth Monthly Contribution 100
HDMF Monthly Contribution 200
Total Mandatory Contributions P 1,300
Multiplied 12
Total Annual Contributions P 15,600 ( 15,600)
Net Taxable Compensation Income P 332,400
In computing the total compensation income, the bonuses are added, but in computing the compensation income
subject to tax, all bonuses and other benefits must be subject to limit of P 90,000; if the total bonuses and other
benefits exceeds P 90,000, the excess thereof shall be taxable. On the other hand, if the total bonuses and other
benefits do not exceed P 90,000, such bonuses and other benefits must not be subject to tax.
Example 6:
Abby is minimum wage earner employed at FCC Company. For taxable year 2018, she had the following data:
Basic Pay P 200,000

Holiday and Overtime Pay 30,000
Productivity Incentives 15,000
Mandatory Contributions:
PhilHealth Monthly Contribution 1,200
HDMF Monthly Contribution 1,000
Compute the net taxable compensation income of Abby.
Solutions:
Basic Pay P 200,000
Total Gross Compensation P 265,000
Less: Non-Taxable Compensation
13th Month Pay P 20,000
Total P 35,000 ( 35,000)
Threshold 90,000 _
Net Taxable Compensation Income P 230,000
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The entire net compensation income is non-taxable because Abby is a minimum wage earner.
Example 7:
Donny, the boss of Abby, is a marketing manager of FCC Company. For taxable year 2018, he had the following data:
Basic Pay P 360,000

Honoraria and other Emoluments 20,000
Other Benefits 45,000
Mandatory Contributions:
PhilHealth Monthly Contribution 2,400
HDMF Monthly Contribution 1,200
Compute the gross compensation income of Donny.
Solutions:
Basic Pay P 360,000
Honoraria and other Emoluments 20,000
Economic Relief Allowances 45,000
Total gross compensation income P 526,000
Less: Non-Taxable Items
13th Month Pay P 30,000
Other Benefits 45,000
Total P 106,000
Threshold 90,000 ( 90,000)
Less: Mandatory Contributions:
SSS Monthly Contribution ( 15,000)
PhilHealth Monthly Contribution ( 2,400)
HDMF Monthly Contribution ( 1,200)
Net taxable compensation income P 427,400
Notice how the P 90,000 threshold differs from examples 5 and 6. In the example above, the total “13th month pay
and other benefits” amounts to P 106,000. Such amount was added in the gross compensation income. Since the first
P 90,000 is non-taxable, there is a need to eliminate said amount to the extent only of the limit. In other words, only
the P 16,000 (P 106,000 less P 90,000) is essentially subjected to income tax as part of the net taxable income.
Revenue Regulation No. 8 – 2018 provides that gross benefits received by officials and employees of public and
private entities, however, the total exclusion under this itern shallnot exceed ninety thousand (P90,000.00), which
shall cover:
o Benefits received by officials and employees of the national and local government pursuant to Republic Act
No. 6686 – this law pertains to the granting of Christmas bonus;
o Benefits received by employees pursuant to Presidential Decree No. 851 as amended by Memoiandum Order
No. 28 dated August 13, 1986 – this law pertains to the granting of 13th month pay;
o Benefits received by officials and employees not covered by Presidentiai Decree No. 851, as amended by
Memorandum Order No. 28 dated August 13,1986; and
o Other benefits such as productivity inceltives and Christmas bonus;
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Business and Professional Income
Business and professional incomes arise from selling of goods and services or the exercise of profession. Whether
individual or corporate taxpayer, business income or professional income may include:
o Sale of Goods (trading, merchandising, and manufacturing)

o Sale of Real Properties (real estate developer)
o Sale of Services (leasing business, professional firms, etc.)
Individuals engaged in business or practicing their profession may deduct the cost goods sold or cost of service from
their gross sales or gross receipts to arrive with gross income subject to tax.
Other non-operating incomes which do not arise from the normal business must also be added to arrive with gross
income. Withholding taxes from professional incomes and other sale of services which are subject to CWT must be
correctly withheld. (See discussions on withholding of taxes.)
The formula in computing the gross income of a taxpayer engaged in business or practice of profession shall be:
Merchandising Business Servicing Business
Gross Sales xxx Gross Receipts xxx

Less: Discounts availed by the customers (xxx) Less: Discounts availed by the customers (xxx)
Net Sales xxx Net Receipts xxx
Less: Cost of Goods sold Less: Cost of Service
Beginning Inventory xxx Cost of Direct Labor xxx
Add: Purchases xxx Cost of Direct Materials xxx
Less: Discounts availed from Suppliers (xxx) xxx Depreciation – Directly used for the Service xxx
Goods available for sale xxx Other direct costs xxx
Less: Ending Inventory (xxx) Cost of Service xxx (xxx)
Cost of Goods Sold xxx (xxx) Gross Income xxx
Gross Income xxx
Manufacturing Business
Gross Sales xxx

Less: Discounts availed by the customers (xxx)
Net Sales xxx
Less: Cost of Goods sold
Direct Materials
Direct Materials, Beginning Inventory xxx
Add: Purchases xxx
Less: Discounts availed from Suppliers (xxx) xxx
Total Direct Materials Available xxx
Less: Ending Inventory (xxx)
Total Direct Materials Used in Production xxx xxx
Direct Labor xxx
Overhead xxx
Total Manufacturing Costs xxx
Work-in Process, Beginning Inventory xxx

Add: Total Manufacturing Costs xxx
Total Work-in Process xxx
Less: Work-in Process, Ending Inventory (xxx)
Cost of Goods Manufactured xxx
Finished Goods, Beginning Inventory xxx

Add: Cost of Goods Manufactured xxx
Total Goods Available for Sale xxx
Less: Finished Goods, Ending Inventory (xxx)
Cost of Goods Sold xxx (xxx
Gross Income xxx
Note that the above formulae are similarly used in the accounting subjects. Thus, at this point, students are already
assumed to have a working knowledge and sufficient background of the above formulae.
Example 7:
D Company, engaged in merchandising business, had the following data during the taxable year:
Gross Sales for the year P 2,500,000
Discounts granted to customers, 60% availed 100,000
Beginning Inventories 400,000
Page 10 of 13
Purchases made during the year 1,250,000

Freight-in shouldered by D Company in its purchases 20,000
Ending Inventories 270,000
Compute the gross income of D Company.
Solution:
Gross Sales for the year P 2,500,000
Less: Discounts availed by the customers ( 60,000)
Net Sales P 2,440,000
Less: Cost of Goods Sold
Beginning Inventories P 400,000
Add: Purchases made during the year 1,250,000
Freight-in shouldered by D Company in its purchases 20,000
Total Goods Available for Sale P 1,670,000
Less: Ending Inventories ( 270,000)
Cost of Goods Sold P 1,400,000 ( 1,400,000)
Gross Income P 1,040,000
Example 8:
Rattan Enterprises is a local export-oriented manufacturing business. During the year 2018, it had the following
information:
Export Sales to China P 3,000,000
Export Sales to New Zealand 2,000,000
Domestic Sales 1,200,000
Information pertaining to cost of sales:
Raw materials beginning inventory 200,000
Work-in Process Inventory, beginning balance from 2017 560,000
Finished Goods Inventory beginning balance 320,000
Purchases of raw materials during the year 2,800,000
Raw materials ending balance, per physical count 170,000
Work-in Process Inventory, ending balance 610,000
Finished Goods on hand during the physical count at year-end 135,000
Total payments to Labor 1,200,000
Overhead 685,000
Compute the gross income of Rattan Enterprises.
Solution:
Export Sales to China P 3,000,000
Export Sales to New Zealand 2,000,000
Domestic Sales 1,200,000
Total Sales P 6,200,000
Less: Cost of Sales
Raw materials beginning inventory P 200,000
Add: Purchases of raw materials during the year 2,800,000
Total raw materials available for production P 3,000,000
Less: Raw materials ending balance, per physical count ( 170,000)
Raw Materials Used in Production P 2,830,000
Work-in Process Inventory, beginning P 560,000

Add: Raw Materials Used in Production P 2,830,000
Total payments to Labor 1,200,000
Overhead 685,000
Total Manufacturing Costs P 4,715,000 4,715,000
Total Work-in Process P 5,275,000
Less: Work-in Process Inventory, ending balance ( 610,000)
Page 11 of 13
Cost of Goods Manufactured P 4,665,000
Finished Goods Inventory beginning balance P 320,000

Add: Cost of Goods Manufactured 4,665,000
Goods Available for Sale P 4,985,000
Less: Finished Goods Inventory ending balance ( 135,000)
Cost of Goods Sold P 4,850,000 ( 4,850,000)
Gross Income P 1,350,000
Shown next page is the summary illustration of income tax computation process.
Page 12 of 13
Income Tax Computation Process

Salaries, Wages, Allowances, Bonuses, Commissions, Separation pay if voluntary, Retirement Pay if
Purely Compensation Fringe Benefits (if taxable,
Employee 13isth Rank-and-File,
Month and Other Benefits
normal Tax; subject to P 90,000
if Employee limit or Supervisorial,
is Managerial
Compensation
fringe benefit tax of 35%, or 25%)
Income Income Earner
Compensation Income – If VAT Registered – Graduated Rates

Graduated Rates GROSS
Mixed Income Earner
Professional or Professional or Business If Non-VAT Registered, but annual gross INCOME
Business Income sales or receipts plus non-operating
Income incomes exceed 3 million – Graduated SUBJECT
Purely Professional or Rates
Business Income Earner TO
If Non-VAT Registered, and annual gross
sales or receipts plus non-operating NORMAL
Services Goods Properties incomes do not exceed 3 million – Optional
TAX
Top 10,000 Top 10,000 Commercial
Personal Properties Spaces
Individuals & Top Individuals & Top
20,000 Corporations 20,000 Residential Lots,
2% CWT
Corporation, 1% Real Properties 1.5, 3, 5% 8% Preferential Graduated
CWT Rate Rates (Creditable
Professional, 5% - 10%,
or 10% - 15% CWT
Residential withholding taxes are
House & Lots
deducted from tax due
Rentals, 5% CWT to arrive with the tax
Interest on Bank Deposits – 20% FWT
Within the Interest on FCDS – 15% FWT Final Withholding Creditable
due and payable.)
Prizes and Winnings – 20% FWT
Philippines Royalty in general – 20% FWT
Taxes Withholding Taxes
Passive Royalty on Books & Literary–10%FWT
Incomes Dividends – 10% FWT
Outside the
Philippines Other Passive Incomes
Personal Personal Properties held as capital assets, subject to holding period

Capital Gains Properties Taxpayer has the option of 6% CWT if sold to
from Dealings Shares of Stocks sold directly to buyer, not traded, 15% CGT Government, capital gains subject to Normal Tax
in Properties Real
Properties Real Properties held as capital assets, 6% CGT general rule 6% CGT if sold to other than the Government
Page 13 of 13
Sources: National Internal Revenue Code of 1997, Republic Act No. 10963 otherwise known as the Tax Reform Acceleration and Inclusion (TRAIN), Republic Act No. 9504, Revenue Regulation No. 8 – 2018, Philippine Constitution of 1987

Definition of Terms: GROSS INCOME: Classification of Taxpayers, Compensation Income, and Business Income

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Definition of Terms: GROSS INCOME: Classification of Taxpayers, Compensation Income, and Business Income

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GROSS INCOME: Classification of Taxpayers, Compensation Income, and Business Income

INTRODUCTION TO INCOME TAXATION

The above discussion can be illustrated as:

Total Receipts or Turnover Total money returned

Income Tax System

CLASSIFICATION OF INDIVIDUAL TAXPAYERS AND THEIR SITUS

1. Resident Citizen (RC)

2. Non-resident Citizen (NRC)

3. Resident Alien (RA)

4. Non-resident Alien Engaged in Trade or Business (NRAETB)

5. Non-resident Alien Not Engaged in Trade or Business (NRANETB)

Income tax follows two fundamental principles, to wit:

INCLUSIONS TO GROSS INCOME

Annualized compensation income (salary and wages, and others) xxx

Taxable Compensation Income xxx

The following are examples of compensation income:

4. Allowances – These include the following:

Monthly Basic Salary P 29,000

Compute the taxable compensation income of Danny.

Monthly Basic Salary (P 29,000 x 12) P 348,000

Basic Pay P 200,000

Compute the net taxable compensation income of Abby.

Basic Pay P 360,000

Compute the gross compensation income of Donny.

Business and Professional Income

o Sale of Goods (trading, merchandising, and manufacturing)

Gross Sales xxx Gross Receipts xxx

Gross Sales xxx

Work-in Process, Beginning Inventory xxx

Finished Goods, Beginning Inventory xxx

Purchases made during the year 1,250,000

Compute the gross income of D Company.

Work-in Process Inventory, beginning P 560,000

Cost of Goods Manufactured P 4,665,000

Finished Goods Inventory beginning balance P 320,000

Income Tax Computation Process

Compensation Income – If VAT Registered – Graduated Rates

Personal Personal Properties held as capital assets, subject to holding period

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