CHAPTER 8

REGULAR
INCOME TAX:
Exclusions from Gross Income
 Mastery of the list of

exclusions from gross

1
income

CHAPTER
Comprehension of

OVERVIEW AND 2
exclusion conditions or

limitations of certain items

OBJECTIVES of income

Knowledge of the list of

entities exempt under the

This chapter discusses the items of 3

income that are excluded from gross
income, hence not subject to income tax
NIRC and special laws
under the NIRC. It also includes discussions
of other exempt income under special
laws, treaties, or contracts.
 EXCLUSIONS FROM GROSS INCOME

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.

Under Sec. 32(B) of the NIRC, the following items shall not be included in gross income and
shall be exempt from taxation:

A. Proceeds of life insurance policy

B. Amount received by the insured as a return of premium
C.Gift, bequest, devise, or descent
D.Compensation for injuries or sickness
E. Income exempt under treaty
F.Retirement benefits, pensions, gratuities, etc.
G.Miscellaneous items
UNDER THE MISCELLANEOUS ITEMS
1. Income in the Philippines of foreign government or foreign government- owned
and controlled corporations
2. Income of the government and its political subdivisions
3. Prizes and awards in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievements .
4. Prizes and awards in athletic sports competitions
5. Contributions to GSIS, SSS, PhilHealth, Pag-IBIG, and union dues
6. Contributions to Personal Equity Retirement Account (PERA)
7. PERA investment income and PERA distributions
8. 13th month pay and other benefits not exceeding P90,000
9. Gains from sale of bonds, debentures, or certificates of indebtedness with
maturity of more than 5 years.
10. Gains from redemption of shares in mutual fund.
11. Income derived from sale of gold pursuant to RA7076 or the People’s Small-
Scale Mining Act of 1991.
 EXCLUSION FROM GROSS INCOME

A. PROCEEDS OF A LIFE

INSURANCE POLICY
The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a
single sum or otherwise; however, if such amounts are held
by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in the gross
income. Life is regarded as a capital item with infinite
value. Hence, the proceeds of life insurance is a return of
capital.
 EXCLUSION FROM GROSS INCOME

B. AMOUNT RECEIVED BY THE INSURED

AS A RETURN OF PREMIUM
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 contract is a return of capital; hence, it is
excluded from gross income.
ILLUSTRATION 1:
SCENARIO 1
LIFE INSURANCE
Alberto died on the 8th year of coverage and
his heirs collected the P1,000,000proceeds.
CONTRACTS The entire insurance proceeds of P1,000,000

Alberto is insured in a
is not taxable.

P1,000,000 life insurance

SCENARIO 2
policy with annual premium
payments of P20,000 for 10 Upon the death of Alberto, the insurance
years. If Alberto outlives the company negotiated for an extension of the
policy after the 10th year, he payment of the proceeds wherein the insurance
will be paid a P500,000 company shall pay P1,050,000 on the extended
payment. The P50,000 excess representing
maturity value.
interest is a taxable item of gross income.
 SCENARIO 3

Alberto outlived the policy and collected the maturity value of P500,000.

The total proceeds shall be analyzed as:

Total proceeds P 500,000

Return of premiums (P20,000 x 10 years) 200,000
Return on capital (item of gross income)
P 300,000
 SCENARIO 4

After 6 years of payment, Albert assigned the policy to Glino who paid him P130,000. Glino
continued the premium payments for two more years after which Albert died. Glino collected the
P1,000,000 insurance proceeds.

The assignment or sale of the policy by Albert to Glino for P130,000 resulted into
P120,000 (P20,000 x 6) return of premiums and P10,000 taxable return on capital.

The receipt of the insurance proceeds by Glino resulted in P170,000 return of capital
(P130,000 + (P20,000 x 2)] and P830,000 taxable return on capital. There is loss of life in
this scenario but it does not pertain to the purchaser of the life insurance policy. Hence,
the excess must be taxable to the heirs.
ILLUSTRATION 2: LIFE INSURANCE 0F

COMPANY OFFICERS

Alberto is insured by his employer corporation for

P1,000,000 with the employer- corporation as the
beneficiary. Alberto subsequently died, and the corporation
collected the P1,000,000 life insurance proceeds.

It is interesting to note that the entire proceeds under this

insurance arrangement are held within the purview of the
NIRC exemption; hence, it is not taxable.
 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.

ILLUSTRATION: PROPERTY INSURANCE

Aztec Company secured a fire insurance covering the entire P2,000,000 fair value of its
office building. The building was completely destroyed by fire when the depreciated cost
(tax basis) of the building was P1,800,000. Aztec recovered the P2,000,000 insurance
proceeds.

The total proceeds shall be analyzed as follows:

Total proceeds P 2,000,000

Less: Basis of property destroyed (return of capital) 1,800,000
Return on capital (item of gross income) P 200,000
 EXCLUSION FROM GROSS INCOME

C. GIFTS, BEQUESTS, AND DEVISES OR

DESCENT
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.

ILLUSTRATION
Mark received a restaurant business as a gift on April 1, 2020. On that date, the restaurant had total
properties amounting to P400,000 including P50, 000 cash income earned since January 1, 2020. The
restaurant posted an additional P150,000 cash income from April 1 to December 31, 2020.

The transfer of business properties worth P400,000 to mark is a gratuity subject to transfer tax, not
income tax.However, the P50,000 donated income shall be included in gross income, but in the income
tax return of the donor. The P150,000 income of the donated property after the perfection of the
donation is included as item of gross income in the tax return of mark, the donee.
 GIFT DISTINGUISHED FROM EXCHANGE
The transferor’s intention or motive must be evaluated in determining
whether a transfer is a gift or an exchange. Gifts are characterized by
pure liberality or disinterested generosity and are given without any
consideration. An exchange always involves a consideration.

EMPLOYMENT GRATUITIES
Gratuities given under an employer-employee relationship are normally
treated in exchange for services rendered by employees. Hence, they
are subject to income tax. The transfer of properties by the employer to
managerial or supervisory employees is 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.
 EXCLUSION FROM GROSS INCOME
D. 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.
ILLUSTRATION 1
Andrew was hit by a jeepney. He paid P100,000 for hospitalization expenses. He sued the jeepney driver
and was awarded by the court a total indemnity of P340,000 divided as follows: P200,000 indemnity for
his pain, anguish and sufferings, P40,000 for his lost salaries, and P100,000 as reimbursement for his
hospital bills.

The P200,000 indemnity and the P100,000 that reimbursement for hospitalization expenses are non-
taxable returns of capital. Note that health is a capital item with infinite value. However, the P40,000
reimbursement for lost salary is a recovery of lost profit; hence, an item of gross income.
 EXCLUSION FROM GROSS INCOME
ILLUSTRATION 2

Mr. Pogi’s brand new car which he bought for P1,200,000 was totally wrecked in a car collision.
Mr. Pogi escaped unharmed. He was paid P1,300,000 for the accident.

The P100,000 excess indemnity is an item of gross income. Note that the law pertains to
personal physical injury rather than injury to rights or property.

E. INCOME EXEMPT UNDER TREATY

Income items that are excluded by international agreement to which
the Philippine government is a signatory are excluded from income tax.
It must be recalled that treaty agreements override provisions of our
revenue tax laws in case of conflict under the exemption doctrine of
international comity.
 EXCLUSION FROM GROSS INCOME
F. RETIREMENT BENEFITS, PENSIONS,

GRATUITIES AND OTHERS BENEFITS

1. 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.
Requisites of exemption: (Mnemonic: 1-10-50-RPBP)
A. This is the first time availment of retirement benefit exemption.
b. The retiring official or employee has been in the services of the same
employer for at least ten (10) years.
c. The retiring employee is at least fifty (50) years of age at the time of
retirement.
d. The employer maintains a reasonable private benefit plan.
A reasonable private benefit plan means a pension, gratuity, stock bonus or profit- sharing
plan maintained by an employer for the benefit of some or all of his officials or employees,
wherein contributions 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
any 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 fund is
held under the management of a trustee free from both employer and employee control.

The 10-year 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.
 ILLUSTRATION 1
Angel was employed in 1990 when she was 25 years old. In 2010, she availed of the early
retirement program of her employer.

Angel satisfied the 10-year cumulative employment requirement but she is only 45
years old (i.e. 25 + {2010-1990}) at the time of her retirement. The retirement benefit is
taxable, It is an inclusion in gross income as compensation income.

ILLUSTRATION 2

Assume that Angel joined another employer and worked therein for 7 more years
after which she retired from her employment.

Although Angel is 50 years old by then,she is only 7 years under the employ of her
second employer. The second retirement benefit is also taxable as compensation
income since she failed the residency requirement.
 ILLUSTRATION 3

Assume instead that Angel was 30 years old when she joined her first employer and
worked therein for 20 years after which she retired at 50. She immediately joined
another employer and retired after 10 years of service when she was 60 years.

The first retirement benefit from the first employer is exempt since Angel is 50 years
old and has rendered at least 10 years of service (I.e., 20 years). the second retirement
benefit from the second employer is taxable even if she met the residency and age
requirements since retirement benefit exemption can be availed of only once in a
lifetime
 EXCLUSION FROM GROSS INCOME
F. RETIREMENT BENEFITS, PENSIONS,

GRATUITIES AND OTHERS BENEFITS

2.Separation or Termination
Requisites of exemption:
1.The separation or termination must be due to job-threatening sickness deaths, or other physical disability; and

2. 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. "( BIR Ruling 054-
2001)

The exemption of termination or separation benefits does not extend to:

1. Backwages or illegal deductions repaid by the employer upon termination
(BIR Ruling 003-2004)

2.Terminal leave pay or the commutation of accumulated unused leave credits

(BIR Ruling No. 199-2011)

To avail of the tax exemption, 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.
 ILLUSTRATION 1

Yvonne is an employee of Goldfish Company which closed its business during the
year.
Yvonne’s last paycheck shows the following details:

Unpaid salary in the last two months P 30,000

Current month salary 15,000
Separation pay 100,000
Total pay P 145,000

The current month salary and the P30,000 backwages are subject to income tax. The
P100,000 separation pay is an exclusion from gross income; hence, not taxable.
 ILLUSTRATION 2

Henson’s employer was downsizing its business operations. Henson was identified among others
to be laid off. To avoid implications of inefficiencies on his part, Henson filed a resignation letter
to the company and received a separation pay of P120,000.

The separation pay is taxable as compensation income since the underlying reason of the
severance of the employment (i.e. resignation) is within the control of the employee. If Henson
got terminated without resigning, the separation pay would be exempt.

ILLUSTRATION 3

Mr. Swabe was diagnosed to have a sexually transmitted disease (STD). Due to this, his employer
decided to terminate his services but granted him P1,000,000 separation pay.

The P1,000,000 separation pay is taxable as STD does not normally render the employee
incapable of working.
 EXCLUSION FROM GROSS INCOME
F. RETIREMENT BENEFITS, PENSIONS,

GRATUITIES AND OTHERS BENEFITS

3. Social Security Benefits, Retirement Gratuities, And Other Similar Benefits From Foreign
Government Agencies And Other Institutions, Private Or Public, received by resident or
non-resident citizens or aliens who come to settle permanently in the Philippines.

ILLUSTRATION
John was an OFW employed by Microsoft corporation in the USA. John retired and returned to
permanently settle in the Philippines. He is paid a $2,000 monthly pension from Microsoft’s
pension fund and another $800 monthly benefit from the US social security benefit.

Both the pension and the social security benefits are exempt. Note that these benefits were
earned abroad when the taxpayer was a non-resident. Under situs rule, the foreign income of
non-residents is not taxable in the Philippines. This holds true even if the taxpayer
subsequently receives the income as a resident of the Philippines.
 EXCLUSION FROM GROSS INCOME
F. RETIREMENT BENEFITS, PENSIONS,

GRATUITIES AND OTHERS BENEFITS

4.UNITED STATES VETERANS ADMINISTRATION (USVA)
Administered benefits under the laws of the united states received by any person
residing in the Philippines.

ILLUSTRATION

Mr. Jackson is a retired US serviceman from the Iraqui war. He married a beautiful
Filipina and settled in the Philippines. He is receiving a $1,000 monthly benefit from
the USVA.

The USVA benefit is excluded in gross income. The same rule applies to USVA
benefits for beneficiaries of Filipino veterans who fought under the American flag in
World War II.
 EXCLUSION FROM GROSS INCOME
5. Social Security Systems(SSS) benefits under RA 8282

6. GSIS benefits under RA 8291 including retirement gratuity received by

government officials and employees

G. MISCELLANEOUS ITEMS
1. 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:

a. Foreign governments
b. Financing institutions owned, controlled, or enjoying refinancing from foreign
government
c. International or regional financial institution established by foreign governments

These are exempt under the exemption doctrine of international comity.

 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS
2. Income derived by the government and its political subdivisions from:
a. Any public utility or
b. Exercise of essential government function

Government agencies and instrumentalities

The general rule with government agencies and instrumentalities is
exemption because of their public service nature. However, taxation applies
when they engage
in income-producing activities which are proprietary or commercial in nature.

This exemption does not extend to government-owned and controlled

corporations (GOCCs). GOCCs are generally taxable as regular corporations
because their operations are proprietary in nature.
 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS
3. Prizes and Awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievements but only if:

a.The recipient was selected without any action on his part to enter the contest or proceeding; and
b. The recipient is not required to render substantial future services as a condition to receiving the

prize or award.

Prizes of this kind partake the nature of a unilateral transfer and hence, exempt from income tax.

These transfers are also exempt by law from transfer tax. If the recipient exerted effort for the grant

of the prize such as joining a contest or is required to render service for its grant, the prize would be

construed as received in an exchange; hence, taxable as income.

Examples of exempt prizes:

a. Nobel Prize award
b. Gawad ng Sining Award
c. CNN Hero of the Year
d. Most Outstanding Citizen
 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS
4. Prizes and Awards in Sports Competitions granted to athletes:

a. In local or international competitions and tournaments;

b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports associations.

5. Contributions for GSIS, SSS, PhilHealth, Pag-Ibig and Union dues of individuals

These pertain to the employee share in the premium contributions to GSIS, SSS,
PhilHealth, Pag-Ibig and union dues. The portion of the salary thus contributed is
exempt from income tax.

Under RMC No. 21-2011, the exclusion pertains only to the mandatory or compulsory monthly

contributions. Voluntary contributions to Pag-Ibig II, GSIS or SSS in excess of the mandatory monthly

contribution are taxable. Note that Pag-Ibig is now called the Home Development Mutual Fund or

HDMF.
 ILLUSTRATION
An employee has a gross compensation income of P400,000 in 2016. His employer deducted P5,000
SSS, P4,000 PhilHealth, P3,000 HDMF, P2,000 union dues and P80,000 creditable withholding tax.

Thus, the gross income subject to regular tax shall be computed as follows:

Gross compensation income P 400,000

Less: Excluded compensation income or contributions
Contributions to SSS P 5,000
Contributions to PhilHealth 4,000
Contributions to HDMF 3,000
2,000 14,000
Union dues
Gross taxable compensation income P 386,000

Note: The creditable withholding tax is not an exclusion in gross income but a tax credit which is
deductible against the income tax due of the taxpayer.

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.
 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS
6. Contributions to Personal Equity Retirement Account (PERA)

PERA 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.

Each OFW is allowed to contribution up to P200,000 per year to a PERA account Non-OFWS are

allowed P100,000 contributions per year. Husband and wife can each contribution up to the

maximum allowable contribution.

Contributions to PERA accounts are exclusions in gross income. This is an additional exclusion and is

separate with the exclusion for contributions to SSS or GSIS. Moreover , PERA contributors are

allowed to claims 5% of their PERA contributions as tax credit against any internal revenue taxes.
 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS
7. PERA investment income and PERA distributions
PERA investment income are exempt from taxes (i.e.,final tax, capital gains tax and
regular income tax). the PERA account assets will be distributed back to the contributor
either in lump sum, life pension or in installment upon reaching the age of 55 or to his
heirs or beneficiaries upon his orher death. PERA distributions are likewise exclusions in
gross income of the contribution or his heirs or beneficiaries as the case may be.

8. 13th Month Pay and Other Benefits received by officials and employees of public or

private entities not exceeding P90,000

13th month pay and other benefits will be discussed in detail in Chapter 10.

 EXCLUSION FROM GROSS INCOME

G. MISCELLANEOUS ITEMS

9. Gains from sale of bonds, debentures, or other certificate of indebtedness

with a maturity of more than 5 years

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” however, does not include “interest”. (Nippon Life Insurance Company of
the Philippines vs. CIR, CTA Case No. 6142)

illustration
On September 1, 2020, an individual taxpayer sold a 6-year term bond investment for
P1,100,000. These bonds bear 8% interest payable every December 31 and were
previously acquired at P1,000,000 face value on January 1, 2020.
 EXCLUSION FROM GROSS INCOME
The gain on sale will be computed as follows:

Selling price P 1,100,000

Less: Cost of bonds sold 1,000,000
Interest accrued (P1M x 8% x 9 mos./12 mos.) 60,000
Gain on sale P 40,000

The gain from the sale of the long-term bonds is exempt because the
bonds have a maturity period of more than 5 years. However, the
accrued interest income is an item of gross income subject to regular
income tax.
 EXCLUSION FROM GROSS INCOME
G. MISCELLANEOUS ITEMS

10. Gains realized from redemption of shares in a mutual fund company by the
investor

The term mutual fund company shall mean an open-end and close-end
investment company as defined under the Investment Company Act.

Mutual funds pool the money invested by different investors and invest the
money to earn investment income which shall add up to the net assets of the
fund. A participating investor must purchase participation shares from the
fund at their Net Asset Value (NAV). Upon redemption of his participation
shares, the investor gains or an by his proportionate share in the increase or
decrease in the Net Asset Value of the fund.
 EXCLUSION FROM GROSS INCOME
ILLUSTRATION
A taxpayer bought 10,000 shares from Golden Dragon Mutual Fund at P120 NAV
per share. The taxpayer redeemed his shares when the NAV per share was P180.

The 600,000 gain, computed as [(P180 - P120) x 10,000], on redemption is

excluded from gross income; hence, exempt from taxation.

The exemption of apparently intended to mitigate double taxation. Most of the

items of income of mutual funds are subject to final tax at source. The
subsequent distribution of these to the investors at redemption should no longer
be subject to income tax. On the other hand, the exemption may have been
intended to promote the growth of mutual funds which are widely regarded as
key participants in providing liquidity in most financial markets.
 OTHER
1. Minimum wage and certain benefits of Minimum wage earners

EXEMPT
2.Income of Barangay Micro-Business Enterprises Act (RA 9178)

INCOME

UNDER
3.Income of cooperatives (RA 9520)

THE NIRC
4.Income of non-stock, non-profit entities

AND
SPECIAL

5.Income of qualified employee trust funds

LAWS 6.Business or professional income of self-employed and or

professionals who opted to the 8%income tax.
 MINIMUM WAGE EARNERS
A minimum wage earner 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 minimum wage earner is exempt from income tax on the minimum wage
including holiday pay, overtime pay, night shift differential pay and hazard pay.

BARANGAY MICRO-BUSINESS ENTERPRISE (BMBE)

A BMBE 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.

The tem service 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/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 ora subsidiary of a large scale
enterprise and its policies, and modus operandi must not be determined bya large scale
enterprise such as in the case of franchises.

To avail of the benefits and privileges of a BMBE, an applicant must secure a certificate of
authority to operate as a BMBE from the Office of the Treasurer of the city or municipality that
has jurisdiction.

Tax Exemption on Income from Operations

Aside from other incentives afforded by the law, the income of BMBE from their operation is
exempt; hence, excluded from the gross income subject to regular income tax. BMBEs file an
Annual Information Return lieu of the income tax return. However, their non-operating, passive,
and capital gains are subject to the appropriate type of income tax.

 EXCLUSION FROM GROSS INCOME

ILLUSTRATION
William has a bakery with total assets of P4,000,000 inclusive of a lot with a
book value of P1,200,000.

Gross income from sales of bread P 300,000

Interest on promissory notes of retail store clients 12,000
Royalties on sale of recipe books 36,000
Dividend income from domestic stocks 10,000

Note that William’s total asset is P2,800,000, excluding the lot. Hence,
William’s
Business qualifies as a BMBE. If William obtained a certificate of authority to
operate as a BMBE, the following items of operating income are exempt from
income tax:
 EXCLUSION FROM GROSS INCOME
Gross income from sales of bread P 300,000
Other operating income:
Interest income from client promissory notes 12,000
Total exempt income P 312,000
Assuming William’s bakery is not registered as a BMBE, the P312,000 total operational income will be subject
to the regular income tax.

Either way, the royalty income and dividend income are exclusions in the gross income subject to regular
tax, but are inclusions in the gross income subject to final tax.

ANOTHER ILLUSTRATION
Chris Santana has an accounting and auditing firm with total assets of P2,500,000. he
derived a total operating income of P1,000,000 in 2014.

The entire P1,000,000 is taxable since Mr. Santana is a professional service provider not
qualified to be a BMBE.
 The income tax exemption of a BMBE may be revoked for
any of the following reasons:

1. Transfer of place of business

2. Value of assets exceeds P3,000,000

REVOCATION
3. Voluntary surrender of the Certificate of Authority
4. Death of the registered individual owner; violation or non-

OF BMBE TAX
compliance with the provisions of RA 9178
5. Merger or consolidation with an entity which is not eligible
EXEMPTIONS to be a BMBE

6. Sale or transfer of the BMBE if a sole proprietorship
without prejudice to the transferee applying fore
registration.
7. Submission of fake or falsified documents
8. Retirement from business, or cessation/suspension of
operations for one year
9. Making false or omitting required declarations or
statements
COOPERATIVES
Cooperatives that transact business purely with members are exempt from all taxes and fees.
Cooperatives that transact business with non-members are likewise exempt from all taxes
and fees if their accumulated reserve and undivided savings do not exceed P10M. Otherwise,
the amount of surplus allocated for interest on capitals is subject to regular tax.

However, the income of any cooperative from non-related sources is fully taxable to regular
tax.

NON-STOCK AND NON-PROFIT ENTITIES

Non-stock entities that are not organized for profit are exempt from income tax on
their income from operations. However, their income from unrelated sources is
taxable.
 QUALIFIED EMPLOYEES TRUST FUND
An employees trust fund which forms part of a pension, stock bonus or profit sharing plan
of an employer for the benefit of some or all his employees is exempt from any income tax
under the NIRC.

CONDITIONS FOR EXEMPTIONS OF EMPLOYEE

TRUST FUNDS
a. Contributions are made to the trust by such employer, or employees, 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.
b. The asset of the fund shall not be diverted for other purposes other than the
exclusive benefit of the employees.
 QUALIFICATION OF EXEMPTION OF

EXEMPTION OF EXEMPT ENTITIES

Tax incentives or exemption is highly disfavored in law. It is not automatic. Taxpayers with
exemptions or tax incentives under any existing laws or contracts must establish their
entitlement by filing required documents with the BIR. BMBEs need to secure a Certificate
of Authority. Cooperatives need to secure a Certificate of Tax Exemption/Ruling (CTE).
Once exemption is established, it only operates prospectively

INCOME OF SELF-EMPLOYED OR PROFESSIONALS

WHO OPTED TO BE TAXED AT 8% INCOM E TAX

The income of self-employed and or professionals who opted to be taxed to the 8%
income tax shall be excluded in gross income subject to regular tax. The 8% income tax
is in lieu of the 3% percentage tax and the progressive income tax.
 INCOME SUBJECT TO FINAL TAX OR

CAPITAL GAINS TAX

Items of income that are subject to final income tax or capital gains tax are not items of
gross income subject to regular income tax. Also, income items that are exempted in the
coverage of final tax or capital gains tax are not taxable to the regular income tax.

EXCLUSIONS VS DEDUCTIONS
Exclusions from gross income are not included in the amount of reportable gross
income in the income tax return. The amount of deductions is initially included in the
amount of gross income but is separately presented as deduction against gross
income in the income tax return.
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