Gross Income

Gross income

As defined in the Tax Code means all income derived from whatever source including but not limited to the following items:

1. Compensation for services, in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items

2. Gross income derived from the conduct of trade or business or from the exercise of a profession

3. Gains derived from dealings in property

4. Interests

5. Rents

6. Royalties

7. Dividends

8. Annuities

9. Prizes and winnings

10. Pensions

11. Partner’s distributive share from the net income of a general professional partnership

Terms

Payroll Period – means the period of services for which a payment of compensation is ordinarily made to an employee by his employer

Employee - individual performing services under an employer-employee relationship

Employer – means any person for whom an individual performs or performed any service, of whatever nature, under an employer-employee relationship.

Statutory Minimum Wage – refers to the rate fixed by the Regional Tripartite Wage and Productivity Board

Minimum Wage Earner (MWE) – refers to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector receiving compensation income of not more than the statutory minimum wage.

Elements of employer and employee relationship under case law

1. Selection and engagement of employees

2. Payment of wages

3. Power of dismissal

4. Power of control

* An arrangement which do no manifest all the elements is not an employer employee relationship but an independent contract for provision of services.

Types of Employees as to function

1. Managerial employees – those who are given powers or prerogatives to lay down and execute managerial policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees.

2. Supervisory employees – those who effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.

3. Rank and file employees – those who hold neither managerial nor supervisory functions.

Types of Employees as to Taxability

1. Minimum wage earners – an employee who is a recipient of minimum wage and is exempt from taxation

2. Special employees – special aliens subject to the 15% final income tax on compensation income.

3. Regular employees – an employee subject to the regular progressive income tax.

Special alien – refers to aliens holding managerial or technical position in a

1. Regional or area headquarters (RHQ) or Regional operating headquarters of multinational companies.

2. Offshore banking units

3. Petroleum service contractors/subcontractors

Optional final income tax to Filipino employees*

Filipinos who are occupying the same positions as those held by special aliens may opt to be taxed at the 15% final income tax on gross income or the regular income tax. Hence, the term “ special alien” includes qualifying Filipino employees who opted to be taxed at 15% of gross income

Problem (1)

Mr. Kuonoman is a non-resident Japanese expert hired as technical employee of FilDrill, a petroleum service contractor developing the Malampaya Service Contract No 32.

Problem (2)

Mr. Camacho, a resident Filipino, is hired as operations manager of the offshore banking unit of Eurobank in the Philippines. Mr. Camacho opted to the 15% preferential income tax.

Problem (3)

Mr. Escala, a resident Filipino, occupies a managerial position in the ROHQ of Cosmetics International. He derived an annual income of P1,100,000 inclusive of P300,000 annual part-time income from outside employment.

The Tax Model on Compensation Income

Gross Compensation Income P xxx

Less: Non Taxable Compensation xxx

Gross taxable Compensation Income P xxx

Non-Taxable or Exempt Compensation

A. Benefits excluded and/or exempted under the NIRC and special laws.

B. Benefits exempt under treaty or international agreements

C. Benefits necessary to the trade, business or conduct of profession of the employer

D. Benefits for the convenience or advantage of the employer.

A. EXEMPT BENEFITS Under the NIRC, As Amended, and Special Laws

1. Renumerations received as incidents of employments

a. Exempt retirement benefits under RA 7641, including exempt retirement gratuities to government officials and employees

b. Exempt termination benefits

c. Benefits from the US Veterans Administration

d. SSS, retirement, gratuities, pensions and similar benefits from foreign government agencies and other institutions, private or public

e. Benefits from SSS, under the SSS Act of 1954, as amended

f. Benefits from GSIS under the GSIS Act of 1937, as amended

2. Employee mandatory contributions to GSIS, Philhealth, HDMF and Union dues.

3. Certain benefits of minimum wage earners

4. De minimis benefits

5. 13th month pay and other benefits not exceeding P82,000.

Exempt benefits of minimum wage earners

1. Basic minimum wage

2. Holiday pay

3. Overtime pay

4. Night shift differential pay

5. Hazard pay

De minimis benefits*

De minimis benefits are facilities or privileges such as entertainment, medical services, or courtesy discount on purchases that are relatively sall value and are furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees.

De minimis benefits are petty fringe benefits exempt from income tax.

1. Monetized unused vacation leave credits of private employees – not exceeding 10 days during the year**

2. Monetized unused vacation and sick leave credits paid to government officials and employees

3. Medical cash allowance to dependents of employees – not exceeding P750 per employee per semester, or P125 per month.

4. Rice subsidy – P1,500 or 1 sack of 50-kg rice per month amounting to not more than P1,500

5. Uniform and clothing allowance – not exceeding P5,000 per annum

6. Actual Medical Assistance – medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance and routine consultation – not exceeding P10,000 per annum

7. Laundry allowance – not exceeding P300 per month.

8. Employee achievement award. e.g. For length of service or safety achievement which must be in the form of tangible property other than cash or gift certificates, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees.

9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum (i.e. Christmas gift and anniversary gifts)

9. Daily meal allowance for overtime work and night or graveyard shift not exceeding 25% of the basic minimum wage on a per region basis.

10. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000 per employee per taxable year.

Taxable de minimis benefits

1. Excess de minimis over their limits

2. Other benefits of relatively small value that are not included in the list of de minimis benefits

Treatment of taxable de minimis benefits

a. For rank and file employees – treated as other compensation income under the category “13th month pay and other benefits”

b. For managerial and supervisory employees – fringe benefits subject to final fringe benefit tax

Problem (4) De minimis limits

Alexander, a private employee who is paid a P600 daily rate, receives the following benefits during the year 2015:

Monetized unused vacation leave credits 9 days

Monetized unused sick leave credits 9 days

Medical assistance7,000

Rice subsidy (P2,000 per month)24,000

Clothing allowance8,000

Laundry allowance6,000

Required: Determine the taxable amount of de-minimis benefits.

Problem (5)

Gioavanni, a government rank and file employee, received the following benefits

Monetized unused vacation leave credits (10 days) 6,000

Monetized unused sick leave credits (15 days) 9,000

Uniform allowance5,000

Laundry allowance4,800

Required: Determine the amount to be included in other benefits

Problem (6)

Professor Radvic was one of the Hall of Fame awardee of Youbee University. He was granted P25,000 cash as loyalty award for his 30 years of service. He was also given P10,000 Christmas gift and an additional P10,000 gift during the institution Founding Day Anniversary. Besides, he was also given free lunch meals with a total value of P15,000 during the same year.

Required: Compute the total taxable de-minimis benefits as other benefits.

B. EXEMPT BENEFITS UNDER TREATY OR INTERNATIONAL AGREEMENTS

Employee benefits of non-Filipino nationals or non-permanent residents of the Philippines from foreign government, embassies or diplomatic missions and international organizations in the Philippines are exempt from income tax.

Filipino employees of foreign governments, international missions and organizations are taxable as a rule, except only to employees of the following organizations:

1. United Nations (UN)

2. Specialized Agencies of the United Nations

3. Australian Agency for International Development (AUSAID)

4. Food and Agriculture Organization (FAO)

5. World Health Organization (WHO)

6. United Nations Development Programme (UNDP)

7. International Organization for Migration (IOM)

8. International Seabed Authority (ISA)

Confirmation of Tax Exemptions

The exemption is not automatic.

Filipinos claiming exemptions under the terms of international agreements or under provisions of special laws granting privileges to international organizations shall file an application for confirmation of tax exemption with the BIR’s International Tax Affairs Division. The confirmation shall serve proof as exemption. Without the confirmation certificate, the employee is taxable.

c. BENEFITS REQUIRED BY THE NATURE OF, OR NECESSARY TO THE TRADE, BUSINESS CONDUCT OF PROFESSION OF THE EMPLOYER.

Benefits or allowances furnished by the employer to the employee to enable them to appropriately and effectively execute their duties as required by the employment are exempt from income tax. This is referred to as “necessity of the employer rule”.

c. BENEFITS FOR THE CONVENIENCE OR ADVANTAGE, OF THE EMPLOYER

Benefits or allowances which are intended for the furtherance of the interest of the employer’s business or to ensure its smooth operations are like exempt from income tax. This is referred to as “convenience of the employer rule”.

GROSS TAXABLE COMPENSATION INCOME

Classification of gross taxable compensation income

1. Regular compensation – the fixed renumerations received by the employee every payroll period

2. Supplemental compensation – other performance-based pays to employees with or without regard to the payroll period.

3. 13th month pay and other benefit – a residual category which generally includes incentive pays and all other taxable employee benefits.*

Problem (7)

An employee received P400,000 regular compensation, P100,000 supplemental compensation and P90,000 13th month pay and other benefits.

How much is the gross taxable compensation income.

Deadline of Filing and Remittance of Withholding Tax on Compensation

Employers shall file 1601-C Monthly Remittance Return of Income Taxes Withheld on compensation on or before the 10th day of the following month the withheld for December which shall be filed on or before January 15 of the succeeding year.

Employers are also required to file BIR Form 1604-CF on or before January 31 of the following calendar year in which the compensation income payments and passive income payments were made.

Treatment of Withholding Tax on Compensation

To the employee the withholding tax on compensation is a tax credit which is deductible against his consolidated or annual income tax due.

If the employee has other items of income that are subject to regular income tax, he must file a consolidated income tax return. The withholding tax on compensation is credited against the total tax due in the consolidated income tax return.

If an employee has no other sources of income subject to regular tax aside from his compensation, he may apply for a substituted filing of tax return.

Substituted Filing of Return

Under the substituted filing system, the employer files the income tax return of the employee. If the amount of tax is correctly withheld by the employer, the employee no longer needs to file an annual income tax return.

REGULAR INCOME TAXATION : INDIVIDUALS

Individual Income Taxation

Subject to:

Final tax

Capital gains tax

Regular income tax

Coverage of Progressive Income Tax

The regular income tax of individuals is referred to as the progressive income tax.

Covers all individual taxpayers, including taxable estates and trusts, except the following taxpayers which are subject to final tax:

a. Non resident alien not engaged in trade or business

b. Special Alien

Regular Tax Model for Individuals

Gross Compensation Income Pxx

Less : Personal Exemptions xx

Taxable Compensation Income Pxx

Gross income from business/profession Pxx

Deductions xx

Net IncomePxx

Taxable Income Pxx

Progressive Tax TableIncome tax due of Individual Taxpayer is determined based on the following scheduler tax rates

OVER BUT NOT OVER PLUS % OF EXCESS OVER

- 10,000.00 - 5% -

10,000.00 30,000.00 500.00 10% 10,000.00

30,000.00 70,000.00 2,500.00 15% 30,000.00

70,000.00 140,000.00 8,500.00 20% 70,000.00

140,000.00 250,000.00 22,500.00 25% 140,000.00

250,000.00 500,000.00 50,000.00 30% 250,000.00

500,000.00   125,000.00 32% 500,000.00

Personal Exemptions

Personal exemptions are the theoretical, personal. Living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer.

These are the arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to the minimum subsistence, taking into consideration the personal status and qualified dependents of the taxpayers.

Who can claim personal exemption?

Individual taxpayers subject to progressive tax can claim personal exemptions. Individuals who are not subject to progressive tax such as the following cannot claim personal exemption

a. Non resident alien not engaged in trade or business

b. Special Alien

Types of personal exemptions

1. Basic personal exemption

2. Additional personal exemption

3. Premium for health and hospitalization insurance

Basic Personal ExemptionRA 9504

RA 8424

(net)(old)

Single, including separated spouse

Without a dependent, widow or widower 50,00020,000

Head of the family 50,00025,000

Married 50,00032,000

Taxable estates or trust 20,00020,000

Additional personal exemptions

For every dependents, not exceeding four 25,000 8,000

Requisites of Claimable Dependents1. A legitimate, legally adopted, recognized natural or

illegitimate child, including a foster child;

2. Living with the taxpayer and dependent upon him for chief support;

3. Not more than 21 years old, unmarried and not gainfully employed;

4. Regardless of age, if incapable of self-support because of physical or mental defect.

Who is the claimant of additional exemption?

The proper claimant of additional exemption is the husband unless he waived his right in favor of the wife.

Problem (1)

Ms. Lovely Landy is single with five dependent children.

Problem (2)Mr. and Mrs, Aparri are both employed and have the following dependent children:

Jazmine 27 years old, married and unemployed

Ramon 25 years old, mentally retarded

John 23 years old, unmarried and unemployed

Rhad Vic 21 years old, married and unemployed

Rodolfo 18 years old, unmarried and employed

Czarina 16 years old, college student with boyfriend

Ramsay 14 years old, high school student

Problem (3)Mr. Masipag supports the following dependents :

Kareen 12 years old foster child, not related by blood

Rennie 15 years old, mentally retarded godson

Mark 21 years old, boyfriend

Mamang 70 years old, sole surviving parent of Ms. Masipag

Romeo 45 years old cousin, a disabled person

Tony 64 years old, uncle.

Problem (4)Mr. Wong, a Chinese national, is employed as a manager in the ROHQ of a multinational company established in the Philippines. He has 3 minor dependent children.

Rule of Change of Status

1. If the taxpayer should have additional dependents during the year, the taxpayer may claim the corresponding additional exemption in full for such year.

2. If the taxpayer dies during the year, his estate may still claim the personal additional exemption for himself and his dependents as if he died at the close of such year.

3. If any of the dependent dies, marries, becomes 21 years old or became gainfully employed during the taxable year, the taxpayer may still claim the same exemption as if the event occurred at the end of the year.