Ch. 8 RIT: Exclusions from Gross Income Flashcards
Explain exclusions from gross income
are income which will not be subject to income tax. They are not included in gross income subject to regular tax, capital gains tax, or final tax
What part of the NIRC, does is state the list of items that shall not be included in gross income and shall be exempt from taxation?
Under Sec. 32(B) of the NIRC
What are the items excluded from gross income?
- Proceeds of a Life Insurance Policy
- Amount received by the insured as a return of premium
- Gifts, Bequests, and Devises or Descent
- Compensation for injuries and sickness
- Income exempt under treaty
- Retirement Benefits, Pensions, Gratuities and other benefits
- Miscellaneous items
Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in single sum or otherwise; however, if such amounts are held by the insurer under an agreement to pay an interest thereon, the?
interest payments shall be included in gross income.
The amount received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. The amount received by the insured as a return of premium on any insurance is a?
return of capital; hence, it is excluded from gross income. The only taxable income is the excess on the return of premium.
How do we calculate tax under property insurance contracts?
The proceeds of property insurance contracts in excess of the tax basis of the property lost or destroyed is a taxable return on capital.
The value of property acquired by gift, bequest, devise, or descent: provided, however?
that income from such property as well as gift, bequest, devise, or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.
How do we distinguish gift from exchange?
Gifts are characterized by pure liberality or disinterested generosity and are given without any consideration. An exchange always involves a consideration.
How do we tax employment gratuities
Gratuities given under an employer-employee relationship are normally treated in exchange for services rendered by employees. Hence, they are subject income tax. The transfer of properties by the employer to managerial or supervisory employees are generally subject to fringe benefit tax. Christmas or major anniversary gifts granted by the employer to employees are de minimis benefit subject to income tax
what are exempted under compensation for injuries and sickness
amounts received through accident or health insurance or under workmen’s compensation acts as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness
Items under retirement benefits, pensions, gratuities, and others benefits
- Retirement benefit under RA. 7641 and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer
- Retirement benefit under RA. 7641 received by officials and employees un the absence of a retirement plan
- Separation or Termination
- Social Security Benefits, Retirement Gratuities, and Other similar benefits from foreign government agencies and other institutions, private or public
- United States Veterans Administration (USVA)
- SSS benefits under RA 8282
- GSIS benefits under RA 8291
Requisites of exemption for retirement benefit under RA. 7641 and those received by employees and officials of private firms with a reasonable private benefit plan maintained by the employer
- This is the first time availment of retirement benefit exemption
- The retiring official or employee has been in the services of the same employer for at least ten (10) years
- The retiring employee is at least fifty (50) years of age at the time of retirement
- The employer maintains a reasonable private benefit plan
Define reasonable private benefit plan
means a pension, gratuity, stock bonus or profit-sharing plan maintained by the employer for the benefit of some or all of his officials or employees, wherein contributors are made by such employer for the officials or employees, or both, for the purpose of distributing to such 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 nay part of the corpus or 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
To be exempt, the retirement benefit plan must be a
“trusteed” plan where the find is held under the management of a trustee free from both employer and employee control
The 10-year service employee service period requirement pertains to
cumulative years of employment with the same employer. It does not need to be continuous years of employment. A requirement for continuous employment would be prejudicial to working women.
Requisites of exemption under RA. 7641 received by officials or employees in the absence of a retirement plan
- The retiring employee is at least 60 years of age
- He must have served the employer for at least 5 years
Note that these examination criteria apply also in cases where the retirement plan is not approved by the BIR
Requisite of exemption under separation or termination
- The separation or termination must be due to job-threatening sickness, deaths, or other physical disability; and
- The same must be due to any cause beyond the control of the employee or official such as:
a. Redundancy
b. Retrenchment
c. Closure of employer’s business
d. Employee lay-off
e. Downsizing of employer’s business
f. Sickness or death of the employee
The phrase “beyond the control of the employee” connotes
involuntariness on the part of the employee. In other words, the separation must not be of his own making
Abandonment of office such as the registration and subsequent appointment to another office is considered as
a voluntary separation and does not fall within the purview of the phrase “for any cause beyond the control of such official or employee”
The exemption of termination or separation does not extend to:
- Backwages or illegal deductions repaid by the employer upon termination
- Terminal leave pay or the commutation of accumulated unused leave credits
To avail the tax exemption under separation or termination, the employee or his heirs shall request for a?
ruling or certificate of exemption (CTE) from the BIR. The request for a CTE and other required documents shall be filed at the RDO where the employer is registered
Miscellaneous items excluded from gross income includes:
- Income derived on 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 or foreign financing institutions
- Income derived by the government and its political subdivisions
- Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements
- Prizes and Awards in Sports Competitions granted to athletes
- Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of individuals
- Employer’s Contributions to Personal Equity Retirement Account (PERA)
- PERA investment and PERA distributions
- 13th Month pay and other benefits received by officials and employees of public and private entities not exceeding P90,000
- Gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than 5 years
- Gains realized from redemption of shares in a mutual fund company by the investor
- Income derived from the sale of gold pursuant to RA7076 or the People’s Small-Scale Mining Act of 1991
Income derived on investments in the Philippines in loans, stocks, bonds, or other domestic securities, or from interest on deposits in banks in the Philippines by:
1. Foreign Governments
2. Financing Institutions owned, controlled, or enjoying refinancing from foreign governments
3. International or regional financial institutions established by foreign governments
are exempt because?
These are exempt under the exemption doctrine of international comity
Income derived by the government and its political subdivisions are exempted when its comes from?
- Any public utility
- Exercise of essential government function
The general rule with government agencies and instrumentalities is exemption because of their public service. However, taxation applies when?
they engage in income-producing activities which are proprietary or commercial in nature
The exemption of government income does not extend to
government owned and controlled corporations (GOCCs). GOCCs are generally taxable as regular corporations because their operations are proprietary in nature
Prizes and Awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements are exempt only if:
- The recipient was selected without any action on his part to enter the contest of proceeding and;
- The recipient is not required to render substantial future services as a condition to receiving the prize or award
Prizes and Awards in Sports competitions granted to athletes are excluded:
- In local or international competitions and tournaments’;
- Whether held in the Philippines or abroad; and
- Sanctioned by their national sports associations
These pertain to the employee share in the premium contributions to GSIS, SSS, PhilHealth, Pag-Ibig and union dues.
Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of individuals
Voluntary contributions to Pag-Ibig II, GSIS, or SSS in excess of the mandatory monthly contribution are?
Taxable
The employer’s share in SSS, GSIS, PhilHealth, and HDMF contributions is not exclusion from gross income but?
an item of deduction against gross income
is a contributor’s voluntary retirement account established from qualified contributions of the contributor and or his employer for the sole purpose of being invested in qualified PERA investment products
PERA (Personal Equity Retirement Accounts)
OFW’s are allowed to contribute up to _________ per year to a PERA account
P200,000
Non-OFW’s are allowed __________ contributions per year
P100,000
Employer’s contributions to employee’s PERA are
exclusions in the gross income of the employee to the extent of the amount that would complete the maximum allowable contribution.
PERA contributors are allowed to claim
5% of their PERA contributions as tax credit against any internal revenue taxes
PERA investment income and PERA distributions are?
exempted
Why is the gain from sale of bonds, debentures, or other certificate of indebtedness with a maturity of more than 5 years are exempted?
This exemption is grounded upon the same assumption that long-term indebtedness is diverted to the financing of long-term projects which is viewed as beneficial to the development of the country.
The term “gain” does not include
interest
To avail of income exemption on the sale of gold, SSMs and gold traders must be registered with?
the BSP. SSMs will have to fulfill various stingent mining standards of the Mines and Geoscience Bureau (MGB) and the Department of Environment and Natural Resources (DENR) aside from securing local permits and clearances
Other exempt income under the NIRC and special laws
- Minimum wage and certain benefits of minimum wage earners
- COVID-19 benefits under Bayanihan to Heal as One Act
- Income of Barangay Micro-Business Enterprises Act (RA 9178)
- Income of cooperatives and non-stock, non-profit entities
- Income of qualified employee of trust funds and PERA Accounts
- Lifetime monthly gratuity to Medal of Valor awardee
- Business or professional income of self-employed and or professionals who opted to the 8% optional tax
is an individual recipient of a minimum wage as fixed by the Regional Tripartite Productivity Wage and Productivity Board of the Department of Labor and Employment. A _______________ is exempt from income tax on the minimum wage including holiday pay, overtime pay, night shift, differential pay, and hazard pay
Minimum wage earner
RA 11494 provides for the following exempt of special benefits for health workers:
- COVID-19 Special Risk Allowance
- Actual hazard duty pay
- Compensation to health workers who contracted COVID-19 in the line of duty
is a business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the business entity’s office, plant, and equipment are situated do not exceed P3,000,000
Barangay Micro-Business Enterprise (BMBE)
The term service for BMBE excludes
those rendered by licensed professionals and partnership and corporations engaged in consultancy, advisory and similar services which are essentially carried out through licensed professionals
A BMBE shall include any
individual owning such business entity or enterprise, partnership, cooperative, corporation, association, or other entity incorporated and/or organized and existing under Philippine laws and registered with the office of the treasurer of a city or municipality
To qualify as a BMBE, an enterprise
must not be a branch or subsidiary of a large scale enterprise and its policies, and modus operandi must not be determined by large scale enterprise such as in the case of franchises
To avail the benefits and privileges of a BMBE, an applicant must secure
the certificate of authority to operate as a BMBE from the Office of the Treasurer oof the city or municipality that has jurisdiction
What income are not excluded for BMBE
non-operating, passive, and capital gains are subject to appropriate type of income tax
Revocations of BMBE Tax Exemptions
- Transfer of place of business
- Value of assets exceeds P3,000,000
- Voluntary surrender of the Certificate of Authority
- Death of the registered individual owner; violation or non-compliance with the provisions of RA 9178
- Merger or consolidation with an entity which is not eligible to be a BMBE
- Sale of transfer of the BMBE if a sole proprietorship without prejudice to the transferee applying for registration
- Submission of fake of falsified documents
- Retirement from business, or cessation/suspension of operations for one year
- Making false or omitting required declarations or statements
What are the conditions for exemptions of employee trust funds
- Contributions are made to the trust by such employer, employee, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan
- The asset of the fund shall not be diverted for other purposes other than the exclusive benefit of the employees
