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MSJG TAX 1 Chap 5

Mar Sean Jan Gabiosa


Chapter Notes
Income Taxation 7th edition Valencia and Roxas
Chapter 5 Exclusion from Gross Income
Nontaxable Compensation Incomes:
a) Holiday pay, overtime pay, night shift differential pay, and hazard pay
earned by minimum wage earners.
b) Compensation income or business income earned outside the Philippines
by OFW, nonresident Filipino citizen, resident alien and foreign corporation;
c) 13th month pay and other benefits not exceeding 82,000 per year;
d) De minimis benefit;
[unspecifics]
e) Life insurance;
f) Health insurance;
g) Retirement benefits under RA 7641
h) Social security benefits, retirement gratuities and pensions
i) GSIS, SSS, Phil-health, and PAG-IBIG benefits and contributions
j) Allowances for military personnel
k) Casual employment
Statutory Minimum Wage (SMW) shall refer to the fixed rate of Regional Tripartite
Wage and Productivity Board (RTWPB).
An employee who receive additional compensation such as commissions,
honoraria, and fringe benefits, in excess of 82,000 taxable allowance, he shall not
enjoy the privilege of being MWE and therefore his entire earnings are no longer
exempt from tax.
MWEs receiving other income from trade, business or practice, except income
subject to final tax, are not exempted from income tax on their entire income
earned during the taxable year.
Any reduction of wages for purpose of exemption shall result to automatic
disallowance of expense.
De minimis ceiling can be used to reach 82,000 nontaxable ceiling of 13 th month
pay and other benefits.
De minimis benefits [all on the list with no thresholds]:
a) Monetized unused vacation leave credits of private employees not
exceeding 10 days;
b) Monetized vacation and sick leave credits to government employees;
c) Medical cash allowance to dependents;
d) Rice subsidy;
e) Actual medical assistance;
f) Laundry allowance;
g) Employee achievements award;
h) Gifts during Christmas and major anniversary celebrations;

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MSJG TAX 1 Chap 5

i) Daily meal allowance;


j) Uniforms and clothing allowances
k) Productivity incentive scheme.
Other benefits which are not on the proper list cannot qualify as de minimis
benefits and hence subject to income tax.
The amount of de minimis benefits conforming to the ceiling shall not be
considered in determining the 82,000 ceiling of 13 th month pay and other benefits.
Taxable
XX

Nontaxable

Basic salary
De Minimis:
Clothing allowance
XX
Other benefits
13th month pay
XX
Excess of de minimis
XX
82,000*
Total
XX
XX
*As long as the total of other benefits is within 82,000.
GSIS, SSS, Philhealth, PAG-IBIG contributions and union dues of individual are taxexempt contributions.
Benefits for the advantage of the employer are not subject to income tax.
Proceeds from a life insurance upon death of insured are nontaxable. It merely
represents a reimbursement for the loss suffered.
When the insurer is alive and received his life insurance, only the premium or the
excess of insurance paid is taxable. It represents a gain from the insurance.
Proceed from a life insurance taken by a corporation to its executive-employee is
nontaxable. Accordingly, the premium expense paid is not a deductible expense.
Gift, Bequest, and Devise
Gift refers to property legally and validly transferred to one
Bequest - personal property transferred from another by will
Devise real property transferred from another by will
When Gift, Bequest and Devise is received without consideration, they are not
subject to tax.
When payments are made to show good will without legal obligation to give, then
the payment is a gift and not subject to tax.
For the part of the recipient it may be a gift, bequest, or devise, but the donor is
subject to donors tax.
Accident and Health Insurance under Workmens Compensation Acts are
nontaxable.
Compensation from damages is taxable if payment is:
a) Loss of anticipated profits;
b) Damages awarded from breach of contract;
c) Interest for nontaxable income;
d) Damages from unrealized income.

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MSJG TAX 1 Chap 5

Tax Exempt Government Tax


a) Income derived by foreign government
b) Income derived by government or its political subdivisions
Income from public utility or from exercise of governmental function accruing to the
Government of the Philippines are excluded from gross income, while income from
government owned corporation (i.e. PAGCOR) are subject to corporate tax but
exempt from VAT.
Income derived from nongovernmental function (i.e. NAPOCOR, PNR) is subject to
income tax.
Prizes and awards are not taxable if the recipient is selected without any action on
his part; or he will not be required to render future services.
Prizes and award not sanctioned by their respective national sports associations
(POSC*) are not exempted from tax.
*Philippine Olympic Sport Committee
Gain on sale of bonds and other certificates with maturity of more than 5 years is
tax-exempt.
PAG-IBIG Mortgage Certificates are tax-exempt.
Senior Citizens earning minimum wage are exempted from income tax.
Inventions are tax-exempt for its first 10 years of commercial sales, but winnings
awarded to inventions are subject to final tax (20%).
BMBE (Barangay Micro Business Enterprise) are exempt from income taxation, as
well as minimum wage law.
State Universities are not subject to income tax.
Cooperatives transacting with members only are exempted from:
a) Income tax from operations;
b) VAT;
c) 3% tax;
d) donors tax to accredited institutions;
e) excise tax; documentary stamp tax; and
f) annual registration fee of 500.
Cooperatives with accumulated reserves of 10,000,0000, provided that its 25%
net income is returned to members, are income tax exempt.