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Exclusions

These are incomes that are exempt from


the tax. They are not considered in
determining gross income.
Tax exclusions
Life Insurance
Amount received by insured as return of premium
Gifts, bequests and properties given through a will
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions and gratuities
Miscellaneous items
Life insurance
These are proceeds paid to
beneficiaries upon the death of the
insured which are not subject to tax.
They are considered more as an
indemnity rather as a gain or profits,
and payments for injuries or sickness as
they are compensatory in nature. They are
not income.
Tax treaty
 A tax treaty is a convention or agreement for
the avoidance of double taxation and prevention
of fiscal evasion of income taxes.
 As of June 2010, the Philippines has 37
effective tax treaties.
 The business profits of a resident of a Contracted
State shall not be taxable in the Philippines,
unless the enterprise of a resident of a Contracting
State conducts business in the Philippines through
a permanent establishment.
Purpose
 A tax treaty is intended to promote international trade and
investment by allocating taxing jurisdiction between the
Contracting States
 A tax treaty is also intended to permit the Contracting
States to better enforce their domestic laws to reduce tax
evasion
Retirement benefits, pensions and gratuities,
Such exclusions under this category include:
 Retirement benefits under Republic Act 7641 or a
reasonable private retirement plan
Reasonable retirement benefit plan – this means a
pension, gratuity, stock bonus or profit sharing plan
maintained by an employer for the benefit of some or all of his
officials and employees the earnings and principal of the
fund thus accumulated, and wherein it is provided in said plan
that at no time shall any part of the income of the fund be
used for or be diverted to any purpose other than for the
exclusive benefit of the said officials and employees.
Termination leave pay – or commutation of leave
credits, is given not only at the same time but also for the
same policy considerations governing retirement benefits.
Thus, not being part of the gross salary or income but a
retirement benefit, terminal pay is not subject to income tax.
 Amount received by an official or employee from the
employer due to separation from the service
because of death, sickness or other physical
disability or for any cause beyond the control of the
official or employee.
 Social security benefits, retirement gratuities,
pensions and other similar benefits received by
resident or non‐resident citizens or resident aliens
from foreign government agencies and other
institutions, private or public.
 Payment of benefits to a resident person under the
United States Veterans Administration.
 Benefits received from or enjoyed under the Social
Security System.
 Benefits received from the GSIS, including
retirement gratuity received by government officials
and employees.
Miscellaneous
Income Derived by a Foreign
Government
Income derived from investments in
the Philippines in loans, stocks, bonds or
other domestic securities, or from interest
on deposits in banks in the Philippines
by:
 Foreign governments
Financing institutions owed, controlled, or
enjoying refinancing from foreign governments
International or regional financial institutions
established by foreign governments
Income Derived by the Philippine Government
This is income derived from any public utility or from
the exercise of any essential government function. It is
also the income accruing to the government or to any
of its political subdivision.
Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational,
artistic, literary or civic achievement
The requirements for the income to be
excluded are:
 The prizes and awards must be granted to
athletes in local and international sports
competitions and tournaments
 Sports competition or tournament held either in the
Philippines or abroad
 Sports competition or tournament must be
sanctioned by their national sports associations
GSIS, SSS, Medicare and Other Contributions
Retirement benefits, pensions, etc.
received by government officials and employees
from the GSIS and SSS in recognition for their
services to the government and retirement
benefits received by officials and employees of
private firms under certain conditions.
13th Month Pay & Other Benefits
Christmas bonus, 13th month pay,
productivity incentives and other benefits
received by officials and employees of public and
private entities up to a maximum of P30,000.
Gains from Sale of Bonds
Gains from the sale or retirement of bonds or
other certificates of indebtedness with a maturity
of more than 5 years.
Deductions
Deductions are items or amounts which the law allows to be
deducted under certain conditions from the gross income in
order to arrive at taxable income.
Deductions are different from exclusions because while
deductions are included in the gross income, tax exclusions
are not. Tax exclusions are not included in the income tax
return unless specified.
Additionally, deductions are different from tax exemptions.
Tax exemptions are grants of immunity to a particular
persons or corporations of a certain class, whereas tax
deductions are applicable to all classes of taxpayers
• The taxpayer seeking a deduction must point to some
specific provisions of the statute authorizing the deduction
• He must be able to prove that he is entitled to the
deduction authorized or allowed
Optional Standard Deductions
Instead of itemized deductions, an individual,
other than a resident alien, may elect a standard
deduction. Such optional standard deduction shall be
equal to 40% of the gross sales or gross receipts of
resident individual taxpayers engaged in business
or practice, or 40% of gross income for corporations.
Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction,
he shall be
considered as having availed of the itemized
deductions.
 Ordinary and necessary trade, business or
professional expenses incurred during the
taxable year
 Interest paid or incurred within the taxable
year on indebtedness in relation with the
taxpayer’s profession
 Taxes paid or incurred within the taxable
year in connection with the taxpayer’s
profession, trade or business
 Losses which are:
• Sustained by taxpayer in connection with taxpayer’s
trade
• From sale or exchanges of capital assets
• From wash sales of stock or securities. Wash sales
refer to sales from stock that are purchased for a lower
price than the original stock price.
• Losses from wagering transactions
 Bad debts ascertained to be worthless and charged off during the
taxable year
 Depreciation of properties used in trade or business
 Depletion of oil wells, gas wells, and mines –the amount of
intangible exploration and drilling costs incurred by the
taxpayer in petroleum and mining operations for
non‐producing wells and/or mines
 Charitable contributions and other contributions paid or made
within the taxable year for the use of the government of the
Philippines or any of its agencies
 Research and development expenditures paid or incurred
during the taxable year in connection with taxpayer’s trade,
business or profession
 Pension Trusts refer to the amount transferred or paid by an
employer maintaining a pension trust
 Premium payments on health and/or hospitalization insurance
not exceeding P 2,400 or P200 per month, provided that the
taxpayer availing of the said deduction has a family income of
no more than P250,000 for the taxable year
 Free legal services exclusive of the 60‐hour mandatory legal
aid services rendered to indigent litigants
Resident Aliens
 Same deductions allowed to citizens.
Non‐resident Aliens
 Non‐resident aliens engaged in trade or are entitled to
the same deductions except for:
• Taxes ‐ The deductions for taxes shall be allowed only if and to the
extent that they are connected with income from the Philippines
• Losses ‐ losses deductible shall be those actually sustained during
the year incurred in business, trade or exercise of a profession
conducted within the Philippines
• Depreciation ‐ for the deterioration of property arising from its
use in the business, trade or profession on properties located in the
Philippines
• Depletion of oil wells, gas wells, and mines –authorized only with
respect to oil wells, gas wells, or mines located within the Philippines
 Citizens and resident aliens whose income is purely
compensation income
• They are allowed, however, personal and additional
exemptions and deduction for premium payments on health
and hospitalization insurance income
 Non‐resident aliens not engaged in trade or business
in the Philippines
 Non‐resident aliens employed by regional or area
headquarters and regional operating
headquarters of multinational corporations,
offshore banking units, or service contractors/
subcontractors engaged in petroleum operations in
the Philippines
 Non‐resident foreign corporations
Deductions allowed only to individual
taxpayers
• Personal exemptions
• Additional exemptions
• Premium payments on health and/or
hospitalization insurance (only for individuals
earning pure compensation income)
 Resident and Non‐resident citizens earning
business or professional income
 Resident aliens
 Non‐residents Aliens
Engaged in trade in the Philippines – entitled
to
personal exemptions equal to the exemptions allowed
by the income tax law of the country of which he is a
citizen or to citizens of the Philippines but not to exceed
the amount fixed in the NIRC as exemption for citizens or
residents of the Philippines
Not engaged in trade – not allowed personal
and
additional exemptions
Individual Taxpayer Amount allowable
Single/ legally separated individual
with no qualified dependents P 50,000
Head of family P 50,000
For each married individual * P 50,000
* In case of married individuals where only one of the
spouses is deriving gross income, only the spouse who earns
income shall be allowed personal exemptions
A head of the family is an unmarried or legally separated
individual with one or both parents, or with one or more
brothers or sisters, or one or more legitimate, recognized
natural or legally adopted children living with and dependent
upon him for their chief support. (Section 35, NIRC)
For each qualified dependent, a P 25,000
additional exemption can be claimed, but only up
to 4 qualified dependents.
Additional exemption shall be claimed by only one
of the spouses in the case of married individuals.

The additional exemption can be claimed by


the following:
• The husband who is deemed head of the family, unless he
explicitly waives his right in favor of his wife
• The spouse who has custody of the child or children,
in case legally separated
• The individuals considered as Head of the Family
supporting a qualified dependent