Items of Gross Income/

Inclusions in Gross Income

- is a broad category pertaining to all items of
income subject to taxation, namely:
1. gross income subject to final tax;
2. gross income subject to capital gains tax; and
3. gross income subject to regular tax
Gross Income Subject to
Regular Tax
Includes, but is not limited to:

1. compensation for services in 6. royalties

whatever form paid
7. dividends
2. gross income from the conduct of
8. annuities
trade, business, or exercise of a
profession 9. prizes and winnings

3. gains derived from dealings in 10. pensions

properties
11. partner’s distributive share
4. interest from the net income of general
professional partnership
5. rents
Royalties
If earned from sources within the Philippines:
generally subject to final income tax except when they are
active by nature.

Active royalty income and royalties earned from sources

outside the Philippines:
Subject to regular income tax.
Illustration:
TorrentIsLife is a distributor of a computer program and
earns royalties from its licensed users. Computer programs
are specifically tailored to each client, and continuing
regular maintenance services are provided. During the year,
client-users remitted a total of P500,000 royalty payments.

The entire P500,000 is subject to regular income tax since

the royalty is an active income to TorrentIsLife.
Illustration 2.
Bob Ong has the following royalties:

Royalties from books published in the P550,000

Philippines
Royalties from books published abroad 300,000
Royalties from franchise exercised 400,000
abroad
Illustration 2.
Bob Ong has the following royalties:

Royalties from books P550,000 Final tax

published in the
Philippines
Royalties from books 300,000 Regular tax
published abroad
Royalties from franchise 400,000 Regular tax
exercised abroad

Remember:
Final withholding tax does not apply to foreign income.
Prizes and Winnings subject
to Regular Tax
 Prizes and winnings that are exempt from final
tax;
 Prizes and winnings TOTALLY EXEMPT:
1.Prizes received without effort to join a contest
2.Prizes in athletic competitions sanctioned by
their national sports association
3.Winnings from PCSO or lotto
 Summary of Rules
Earned from sources
Within Abroad
Prizes:
P10,000 and below Regular tax Regular tax
More than P10,000 Final tax Regular tax
Winnings other than PCSO and
Final tax Regular tax
lotto

Note: PCSO and lotto winnings are exempt from any income tax. However,
lotto winnings from abroad are items of gross income subject to
regular tax for taxpayers taxable on global income.
Partner’s Distributable Share
from the Net Income of the GPP
 Remember:
GPP – not subject to income tax (i.e., final tax, CGT, or
RIT), because they are merely viewed as pass-through
entities.

 The partners are the ones subject to regular tax on their

share in the net income of the GPP.
Illustration.
Phineas and Ferb practice their profession in a general
professional partnership and share profits 60:40. Their
firm reported the following:
Gross Receipts P 2,000,000
Less: Professional expenses 1,200,000
Net income from operations P 800,000
Interest from bank deposits 20,000
Distributive net income P 820,000
Illustration.
The share of the partners in the net income of the partnership
shall be computed as:

Total distributive to Phineas(60%) P 492,000

Total distributive to Ferb(40%) 328,000
Distributive net income P 820,000

The partners shall include their respective shares in their gross

income subject to regular income tax.
Business Partnership and Taxable
Joint Venture or Co-ownership

 Subject to corporate income tax

General Criteria for Items
of Gross Income
The regular income tax has a catch-all provision for
all income derived from whatever sources that are:
1. Not subject to final tax, capital gains tax, and
special tax regime;
2. Not excluded or exempted by law, treaty, or contract
from taxation.
Other Sources of Gross Income
Subject to Regular Income Tax
1. Income distributions from taxable estates or trusts
2. Share from the net income of other pass-through entities:
a. exempt joint venture
b. exempt co-ownership
3. Farming income
4. Recovery of past deductions
5. Reimbursement of expenses
6. Cancellation of indebtedness for a consideration
INCOME TAX ON CERTAIN
PASSIVE INCOME
The following passive income shall be subject to the following
income tax rates:

1. Interests from any currency bank deposit and yield or

any other monetary benefit from deposit substitutes 20%
and from trust funds and similar arrangements
2. Interest income received by an individual taxpayer
(except a non-resident individual) from a depository 15%
bank under the expanded foreign currency deposit
system
3. Proceeds of pre-terminated long-term deposit or
investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form
as prescribed by the BSP

The final tax shall be based on the remaining maturity of

the investment:

4 years but less than 5 years – 5%

3 years but less than 4 years – 12%
Less than 3 years – 20%
4. Royalties (except royalties on books and other literary
works and musical compositions) – 20%

5. Royalties on books and other literary works and musical

compositions – 10%

6. Prizes (except prizes amounting to P10,000 or less) – 20%

7. Winnings (except PCSO and Lotto winnings amounting to

P10,000 or less) – 20%
8. Cash and property dividends – 10%

9. Capital gains from sale of shares of stock not

traded in the Philippine Stock Exchange – 15%

10.Capital gains from sale of real property located in

the Philippines – 6%
1. Which is an item of gross income subject to regular tax?
A. Interest income from bank deposits
B. Passive royalty income
C. Capital gain on sale of domestic stocks
D. Gain on sale of lot by a realty dealer
2. Which is not an item of gross income subject to final
tax?
A. Dividends from a domestic corporation
B. Prizes in excess of P10,000 by an individual
C. Winnings
D. Share in the income of a general professional
partnership
3. All of these are items of gross income subject to regular
tax except one. Select the exception.
A. Interest income from long-term bank deposits
B. Ordinary gain on sale of properties
C. Interest on notes receivable
D. Compensation income