iii. Taxability

i. Existence of income

For a taxable income to exist, gain or profit is necessary. Before a condonation or forgiveness of debt will give rise to a taxable income, there must be an increase in the assets of the debtor thereby enriching the latter. The condonation of debt will not be subject to income tax if it does not result in the reduction of the taxable income of the debtor or the debtor is in a capital deficit position after the condonation. (BIR Ruling No. DA-(C-335)815-09¹)

(a) Condonation of indebtedness

Pertains to forgiveness of indebtedness

(b) Recovery of accounts previously written off

Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of gross income in the year of recovery to the extent of the income tax benefit of such deduction (tax benefit rule)

(c) Receipt of tax refunds or credit

Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of income tax benefit of said deduction. If foreign income tax was deducted, its refund is included in gross income to the extent the deduction produced an income-tax benefit.

The following are non-taxable tax refunds (i.e., nondeductible taxes):

• In general, Philippine income tax
• Final taxes, being in the nature of income tax
• Income tax imposed by authority of any foreign country for which the taxpayer elected a foreign tax credit
• Estate and donor’s taxes
• Taxes assessed against local benefits of a kind tending to increase the value of the property assessed
• Special assessments

Rationale

These are items not included in the determination of gross income either because:

• They represent return of capital or are not income, gain or profit;
• They are subject to another kind of internal revenue tax; or
• They are income, gain or profit that is expressly exempt from income tax.

Taxpayers who may avail

All taxpayers may avail of exclusions from gross income.

(a) Under the Constitution

Income derived by the Government or its political subdivision, including government instrumentalities, from the exercise of any essential government function

(b) Under the Tax Code

i. Proceeds of life insurance policies

Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured.

Insured must die to avail of total exemption. If he survives, there’s only partial exemption to the extent that the proceeds constitute return of capital (total amount of premiums previously paid.)

However, if such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the gross income.

ii. Amount received by insured as 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 are excluded from gross income.

iii. Amounts received under life insurance, endowment or annuity contracts

Amounts received under life insurance, endowment, or annuity contracts during the term, at maturity, or upon surrender are excluded only to the extent they return premiums paid, except for death proceeds excluded under Sec. 32(B)(1) of the NIRC. Gains above the premiums paid and taxable interest remain includible in gross income under Sec. 32(B)(2) of the NIRC.

iv. Value of property acquired by gifts, bequest, devise or descent

To be excluded from gross income, must be characterized by disinterested generosity and pure liberality.

However, income from such property shall be included in gross income.

Difficult to establish gift situations if there is an employer-employee relationship; a bonus/assistance in recognition of service rendered is not exempt.

If given under a) constraining force of any moral or legal duty, or b) from the incentive of an anticipated benefit of an economic nature; or c) where it is a return for services rendered, proceeds cannot qualify as a gift.

Most critical is the giver’s intention or motive.

Can be a gift if given on account of filial relationship.

v. Amount received through accident or health insurance plus damages received

Received through Accident/Health Insurance or Workmen’s Compensation Act², as compensation for personal injuries/sickness + amount of damages received on account of such injuries/sickness.

Damages will be exempt only if they arise together with personal injury; however, if damages only amount to return of capital, it is exempt (e.g. damages from car accident exempt only if claim includes compensation for personal injury; if no personal injury, damages for car wreckage will only be exempt to the extent of the amount of the actual damage as return of capital.)

Must be physical injury, not injury to rights.

vi. Income exempt under treaty

To the extent required by any treaty obligation binding upon the Philippine government

vii. Retirement benefits, pensions, gratuities

Retirement benefits received under RA 7641³ (amending the Labor Code⁴) and those received in accordance with a reasonable private benefit plan.

“Under RA 7641”

Conditions:

• At least 60 years old;
• 5 years of service at time of retirement; and
• In the absence of an applicable retirement plan or agreement, retirement upon reaching age 60, but not beyond the compulsory retirement age of 65, under RA 7641

Availed if there is no reasonable private benefit plan.

Retirement pay received under RA 7641 is excluded from gross income; ½ month salary for every year of service is the statutory minimum retirement benefit, not a ceiling on the exclusion. Benefits under a reasonable private benefit plan are excluded only if the conditions in NIRC, Sec. 32(B)(6)(a) are met.

“Reasonable private benefit plan”

Conditions:

• At least 50 years old; and
• In the service of same employer for at least 10 years at time of retirement

Must be approved by the BIR

A pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials/employees, wherein contributions are made by such employer for the officials/employees, or both, for the purpose of distributing to such officials & employees the earnings & principal of the fund thus accumulated; no part of the income shall be used for/be diverted to any purpose other than for the exclusive benefit of the said officials & employees.

Service must be continuous

Can be availed of only once (once one has availed of RPBP, he cannot avail of another RPBP); however, he can avail of exemption under another ground such as SSS or GSIS benefits.

The phrase “shall not have availed of the privilege under a retirement benefit plan of the same or another employer” found in Sec. 32(B)(6)(a) of the NIRC⁵ means that the retiring official must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan. (BIR Ruling No. 125-98)⁶

viii. Amount received as a consequence of separation for any cause beyond control of employee (death, sickness or other physical disability)

Separation benefits are excluded from gross income when separation is due to sickness or other physical disability beyond the employee’s control under Sec. 32(B)(6)(b) of the NIRC. Benefits from separation due to retrenchment come under exemption (no choice/option); but if the employee avails of an optional early retirement plan, he cannot reason that he was separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits on this ground but he can claim under other grounds such as RPBP or RA 7641⁷.

The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase “for any cause beyond the control of the said official or employee” found in Sec. 32(B)(6)(b) of the NIRC⁸. (BIR Ruling No. 143-98⁹)

ix. Benefits received from a foreign government by residents or nonresident citizens or aliens who reside permanently in the Philippines

x. Veterans benefits

xi. Benefits under SSS

xii. Benefits received from GSIS

xiii.Income Derived by the Government or its Political Subdivisions

xiv.Winnings, prizes and awards

Under Sec. 32(B)(7)(d) of the NIRC, prizes and awards granted to athletes in local or international sports competitions and tournaments, whether held in the Philippines or abroad, are excluded from gross income if the competitions are sanctioned by national sports associations duly accredited by the Philippine Olympic Committee.

Contemplates a particular competition, not a cumulative achievement.

“Prizes and awards”

In recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if:

• Recipient was selected without any action on his part; and
• Recipient not required to render substantial future services as a condition of receiving the prize/award

(c) Under Special laws

RA No. 9505¹⁰: Personal Equity and Retirement Account (PERA) Act of 2008 (Rev. Regs. 17-11¹¹)

PERA shall refer to an employee-contributor’s voluntary retirement account established from the contributor’s own contributions and/or his employer’s contributions, for the purpose of being invested solely in qualified/eligible PERA investment products

PERA contributions from the employer to the employee’s PERA are excluded from the employee’s gross income. On the other hand, the employer can claim the actual amount of his contribution as a deduction from his gross income, but only to the extent of his contribution that would complete the maximum allowable PERA contribution of the employee.

Political campaign expenses

As a rule, campaign contributions are not included in the taxable income of the candidate to whom they were given.

Unutilized campaign funds shall be subject to income tax.

Any candidate (winner or loser) must file with the COMELEC his/her statement of expenditures. If not, he/she will be precluded from using such expenditures as deductions from his/her campaign contributions. As such, the entire amount of such contributions will be directly subject to income tax. (Rev. Regs. 07-11, Sec. 2)¹²