CHAPTER V: GROSS INCOME procedures, encouraging both domestic and

foreign investments. ​
GROSS INCOME - is the total earnings a person or
business receives before any deductions, such as taxes ●​ Special Economic Zone Act (RA 7916) – AN
or expenses. ACT PROVIDING FOR THE LEGAL
FRAMEWORK AND MECHANISMS FOR THE
When Included in Gross Income: If an income source CREATION, OPERATION, ADMINISTRATION,
is included in gross income, it is taxed. The type of tax AND COORDINATION OF SPECIAL
depends on the taxpayer's status: ECONOMIC ZONES IN THE PHILIPPINES,
CREATING FOR THIS PURPOSE, THE
●​ NORMAL/NET INCOME TAX - Individuals PHILIPPINE ECONOMIC ZONE AUTHORITY
(citizens, residents, or non-resident aliens (PEZA), AND FOR OTHER PURPOSES.
engaged in trade or business, or NRAETB);
allows deductions from gross income to 3. Gains derived from dealings in property
determine the taxable income subject to tax.
●​ REGULAR CORPORATE INCOME TAX - ●​ Include real or personal property, whether
Corporations (domestic or resident foreign ordinary or capital assets.
corporations); allows deductions from gross ●​ Gains from ordinary assets and capital assets,
income to determine the taxable income whether real or personal are included in gross
subject to tax. income.
●​ GROSS INCOME TAX - Non-resident aliens not ●​ Exceptions: sale of shares of a domestic
engaged in trade or business (NRANETB) and corporation under Section 24(C), and gains on
non-resident foreign corporations; doesn’t sale of real property under Section 24(D)(l) of
allow deductions and the entire gross the Tax Code.
income is subject to25% or 30% tax.
4. Interest
If an income is excluded from gross income, it
means it’s not taxable under normal/net income tax, ●​ Loans or lending activities – included in gross
RCIT or gross income tax because: income.

●​ The income is tax-exempt. Income tax derived from Interest from bank deposits
●​ The income is considered passive income (like depends on the source of the interest (within or without
interest from bank deposits), which is taxed the Ph) and the classification of the income earner:
separately at a final rate. (final income tax) The
Supreme Court ruled in Commissioner of ●​ Sources within the Philippines: earned by
Internal Revenue v. Philippine Airlines, Inc. resident citizen, non-resident citizen, resident
that passive income is already taxed at the alien, NRAETB, domestic corporation, and
source and should not be included in the gross resident foreign corporation is subject to final
income used for computing taxable income. income tax (FIT).
●​ If the recipient is a NRANETB and non-resident
ITEMS INCLUDED IN GROSS INCOME foreign corporation, the interest is subject to
gross income tax (GIT).
Section 32(A) of the Tax Code NIRC states "including ●​ Sources outside the Philippines earned by
but not limited to." resident citizen and domestic corporation is
included in the gross income and subject to
1. Compensation for services in whatever form paid, normal income tax (NIT) or regular corporate
including, but not limited to fees, salaries, wages, income tax. If received by all other taxpayers,
commissions, and similar items. the interest is not taxable in the Philippines.

●​ Any payment received for services under an 5. Rents/Rental Income

employer-employee relationship (important
element to know if compensation for service is Money earned from leasing property is included in gross
classified as compensation income) is income, taxable for final income tax.
compensation income.
●​ If you’re self-employed (e.g., a freelance doctor), 6. Royalties
your income is income derived from the
exercise of profession, not compensation ●​ Royalties are payments for the use· of a
income. property or a right. Royalties may be included in
the gross income subject to normal/net income
2. Gross income derived from the conduct of trade tax, final income tax, or gross income tax,
or business or the exercise of a profession depending upon the source of the income and
who the income earner is.
●​ This income is an active income, an income
received from running a business or practicing a 7. Dividends
profession (like being a self-employed doctor or
lawyer). ●​ Dividends are profits distributed by corporations
to their shareholders.
TAX-EXEMPT INCOME UNDER SPECIAL LAWS AND
AGREEMENT 8. Annuities

●​ Barangay Micro-Business Enterprises (RA An annuity is a fixed payment received regularly, often
9178) – An act to promote the establishment of from a retirement plan. It becomes taxable when the
BMBEs providing incentives and benefits total payments exceed the amount the person originally
therefor, and for other purposes.​ paid into the plan.
Section 7. Exemption from Taxes and Fees –
All BMBEs shall be exempt from tax for income 9. Prizes and Winnings
arising from the operations of the enterprise.
●​ Omnibus Investment Code (Executive Order Prizes included in the gross income:
226) – promote investments in the Philippines
by offering incentives and streamlining
 ●​ P10,000 or less - received by RC, NRC, RA, of some or all of his officials or employees,
NRAETB from sources within the Ph. wherein contributions are made by such
●​ Regardless of amount - by RC, outside the Ph. employer for the officials or employees, or both,
●​ Regardless of amount and source - received for the purpose of distributing to such officials
by domestic corp. within the Ph. and employees the earnings and principal of the
●​ Regardless of amount - received by foreign fund thus accumulated.
corp. From sources within the Ph.
To be tax-free, the retirement plan must be reasonable
10. Pensions and must meet these conditions:

Pensions are regular payments made to retirees or ●​ The employee must have worked for at least
their dependents. Some pensions are excluded from 10 years in the same company.​
gross income (such as those from government
retirement benefits), but others must be included ●​ The employee must be at least 50 years old.​
unless exempted under specific laws.
●​ The employee should not have used a
11. Partner's distributive share from the net income retirement benefit plan before.
of the general professional partnership
If you meet these conditions, your retirement benefits
A general professional partnership (GPP) itself does won’t be taxed.
not pay income tax, but its individual partners do.
Other Benefits That Are Tax-Free (Section 32(B)(6))
●​ Example: A lawyer in a law firm (GPP) gets a
share of the firm's earnings, which is included in Aside from retirement benefits, the following payments
their gross income and taxed individually. are also not taxed:

B. EXCLUSIONS (Section 32(B) of the Tax Code) ●​ Social Security and Government Benefits​

1. Income Exempt Under Treaty ○​ Retirement benefits from SSS (for

private employees) and GSIS (for
Section 32(B) (5) NIRC: Income of any kind, to the government employees).​
extent required by any treaty obligation binding upon the
Government of the Philippines. ○​ Pensions and gratuities from local and
foreign institutions.​
This rule means that if there is an international
agreement (a treaty) between the Philippines and ●​ Veterans' Benefits​
another country, and that treaty says certain types of
income should not be taxed, then those earnings will ○​ Payments from the U.S. Veterans
not be included in gross income and are exempt from Administration for those who served in
tax. It helps avoid double taxation. the U.S. military and are residing in the
Philippines.
Example: If an American teacher comes to the
Philippines to work in a university, and there is a treaty Separation Pay (Tax-Free Under Section 32(B)(6)(b))
between the U.S. and the Philippines saying that foreign
teachers don’t need to pay income tax, then that If you lose your job due to reasons beyond your
teacher’s salary will not be taxed in the Philippines. control, the money you receive as separation pay is not
taxed. Examples include:

✅
In short, if a treaty says certain income should not be
taxed, then the Philippines must follow that agreement Company closure or downsizing (retrenchment,

✅
and exclude that income from taxation. redundancy).​

6. Retirement Benefits, Pensions, Gratuities, etc.- ✅ Health issues that prevent you from working.​
Death or disability of the employee.

When you retire or leave a job, you might receive

benefits. Some of these benefits are not taxed as long
🔹 Important: If you voluntarily resign or retire, your
separation pay is not tax-exempt.
as they meet certain conditions. This section explains
which retirement benefits are tax-free and why. Section Terminal Leave Benefits (Unused Leave Pay)
32(B)(6) of the Tax Code contemplates two retirement
benefits
This refers to unused leave credits (sick leave,
vacation leave) that an employee cashes out when they
Types of Retirement Benefits leave the company.
There are two main types of tax-exempt retirement Tax-Free Terminal Leave Benefits:
benefits:
●​ Government employees
1.​ Retirement benefits under Republic Act (RA) ●​ Private employees if the leave is part of
7641 -benefits received by an employee from a retirement benefits
private firm without a retirement plan:
●​ You must be 60 to 65 years old when retiring.
Partially Taxable for Private Employees:
●​ You must have worked at least 5 years for the
same employer.​
●​ Sick leave is taxable.
●​ Vacation leave of up to 10 days is tax-free,
2.​ Retirement benefits under Republic Act (RA)
but anything more than that is taxed.
4917 - benefits received from private firms by
employees with a reasonable private retirement
plan.

"Reasonable private benefit plan" means a

pension, gratuity, stock bonus, or profit-sharing
plan maintained by an employer for the benefit