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Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law
PART 1: INTRODUCTION – TAX PRINCIPLES AND DOCTRINES TAXATION -mode of raising revenue for public purposes. -raising of funds for the use and support of the government -power by which the sovereign raises revenue to defray the necessary expenses of the government. It is a way of apportioning the cost of government among those who in some measure are privileged to enjoy the benefits and must therefore bear its burden. LIFEBLOOD DOCTRINE The power of taxation is important and essential because the government can neither exist nor endure without taxation. Taxes are the lifeblood of the government; their prompt and certain availability is an imperious need. The collection of taxes must be made without hindrance if the state is to maintain its orderly existence. Government projects and infrastructures are made possible through the availability of funds provided through taxation. The government’s ability to serve and protect the people depends largely upon taxes. Thus, taxes are what we pay for a civilized society. “Bread and Butter Principle” - to to exist, the state needs lifeblood (taxes) because there is a necessity for continuous existence.
tax, as it affects the power to impose it. In this case, it will be a political question which the courts cannot interfere. *subject to the test of reasonableness; taxation may ent of the state’s police also be made the implem ent power.
THEORIES IN TAXATION a.) NECESSITY THEORY It is a necessary burden to preserve the state’s sovereignty and a means to give the citizenry an army to resist aggression; a navy to defend its shores from invasion; a corps of civil servants to serve; public improvements for the enjoyment of the citizenry; and those which come within the state’s territory and facilities and protection which a government is ought to provide. b.) BENEFITS-PROTECTION THEORY The power of taxation is based on the power of the state to demand and receive taxes on the reciprocal duties of support and protection. “Doctrine of Symbiotic Relationship ” ” Taxpayer cannot complain on the burden of taxation because it is an obligation. It is involuntary and compulsory, in exchange for the protection and benefits a taxpayer receives from the state. The government responds in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values.
NATURE OF TAXATION a.) Inherent attribute of sovereignty -taxation is an incident of sovereignty. It belongs to a government as a matter of right. -the constitution is not a source of the said power. It merely imposes limitations as to its exercise. Thus, the relinquishment of the power is never presumed. -the mere existence of the government is a necessity. This is the reason why the state collects taxes. No sovereign state can continue to exist without means to pay its expenses.
HOW EXTENSIVE IS THE TAXING POWER? Taxation is said to be comprehensive, unlimited, plenary, and supreme. -It is comprehensive as it covers persons, businesses, activities, professions, rights, and privileges. -It is unlimited because the courts scarcely venture to declare that it is subject to any restrictions, whatever, except as such as rest in the discretion of the authority which exercises it. -it is plenary as it is presumed complete. -it is considered supreme insofar as the selection of the subject of taxation.
b.) Legislative in character -exclusively vested in the congress. -primarily, the legislature has the discretion to determine the nature (kind of tax), object (purpose of tax), extent (tax rate), coverage (subjects of taxation) and situs (place where to impose) of taxation within its jurisdiction. -courts have no power to inquire into or interfere in the wisdom, objective, motive, or expediency in the passage of a tax law; Otherwise, it would contrary to the principle of separation of powers. ’S ROLE – to determine whether COURT ’ the purpose is a public one and at this stage, it is a justiciable controversy. However, once the public purpose is determined, the courts can make no other inquiry as to the purpose of the
*not to be understood as the strongest of all the other inherent powers of the state; i.e. police power and eminent domain
OBJECTIVE AND PURPOSE OF TAXATION A.) Primary -raise revenues for the support of the government and for all public needs/ - to raise funds or property to enable the state to promote the general welfare and protection of citizens B.) Secondary or non-revenue purposes -taxation does not always be for the purposes of revenues because it may include the following: *reduction of social inequality Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law -as depicted by the progressive tax system that the country has. This is a tax system wherein the tax rate of a tax payer increases as the tax base increases. *encourage the growth of local industries -the state may grant tax exemptions which serves as incentives to encourage investment in our local industries. *protection of local industries against unfair competition *as an implement of police power (regulatory measure)
or made available by the government Payment for just compensation or fair value of the property taken No direct benefit, except the privilege to live in a healthy and economically and socially progressive society
Power of taxation to be exercised with caution -to minimize injury to the propriety rights of a tax payer -it must be exercised fairly, equally, and uniformly, lest the tax collector kill the “hen that lays the golden eggs.”
5. Relation to the non-impairment clause Inferior to it (subject to Taxation other limitations) Generally superior and Eminent Domain may override said clause Generally superior and Police Power may override said clause
SIMILARITIES AND DISTINCTIONS OF THE POWERS OF TAXATION, EMINENT DOMAIN, AND POLICE POWER
STAGES OF TAXATION First stage – Levy, it is basically the enactment of a tax law by the congress. Second stage – Assessment and collection, it is the stage where taxes are administered and implemented. Third stage – Payment, it is the act of compliance of the tax payer to the tax law where he or she pays his or her tax dues.
A.) Similarities -necessary attribute of sovereignty -inherent power because the constitution only provides limitations as to its exercise and does not confer the power and is not a source -they interfere with private rights and property *as to the 3 inherent powers, taxes are always the lifeblood of a state. Police power and Eminent Domain cannot be effectively exercised because money and revenues are needed to exercise them.
B.) Distinctions 1. As to purpose Taxation Eminent Domain Police Power
For the support of the government For public use Property is taken or destroyed for public welfare
2. Authority that imposes Taxation Only the government The government, and Eminent Domain may be granted to public service companies Police Power Only the government 3. As to who are affected Taxation Upon all persons A particular owner of a Eminent Domain property Police Power Upon all persons 4. As to compensation or benefits received Protection, service, and Taxation other benefits rendered
*The first and second stages are the impacts of taxation while the last stage is the incident of taxation.
CANONS OF TAXATION A.) Fiscal Autonomy -sources of revenues must be adequate to meet the expenditures and other public needs. This is consistent with the lifeblood doctrine. B.) Theoretical Justice -a sound tax system must take into consideration the tax payer’s ability to pay. -taxes must be reasonable, just, fair, and conscionable -as a rule, taxation must be uniform and equitable. An example is the progressive tax system the country has C.) Administrative Feasibility -must be capable of effective and efficient enforcement -it requires that each tax should be clear and plain to the taxpayer -the capability to enforce tax laws efficiently -must be convenient as to time and manner of payment, and not duly burdensome upon or discouraging to business activity INHERENT LIMITATIONS OF TAXATION A.) Taxation must be for public purpose -Public purpose is presumed in all tax laws -Generally, it is for the common good of the people. This is because the power of taxation may Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law be used as an import of police power. Congress may choose to create tax law that will benefit a specific group of people or industry in a business. It may also be used for regulation of certain acts. -tax laws must be equitable -tax laws must be reasonable B.) International Comity -tax immunities are granted upon other sovereign states as courtesy to the international community. This is consistent with the doctrine of sovereign equality among states. According to this doctrine, states are juridically equal, enjoy the same rights and have equal capacity and exercise. C.) Territoriality -tax laws only operates within our jurisdiction. D.) Non-delegation of the power to tax -the power to tax is exclusively vested in the legislative body Exception: -Article VI, Sec. 28(2) of the Constitution -Article X, Sec. 5 of the Constitution; Sec. 133, R.A. No. 7160 E.) Exemption from taxation of government agencies/instrumentalities -properties of the national government as well as those of LGUs are not subject to tax. They are ought to perform public functions for public service; otherwise, it will result in the absurd situation of the government “taking money from one pocket and putting it in another.” Exception to the exemption: Government entities or instrumentalities, like GOCCs performing proprietary functions are subject to taxation; unless they are granted exemption by law. Examples of these exempted GOCCs are the GSIS, SSS, PhilHealth, PCSO. CONSTITUTIONAL LIMITATIONS A.) Due Process clause “No person shall be deprived of life, liberty, or property without due process of law . . .” -this right is afforded to all citizens. A tax law may be invalidated when it violates the inherent limitations (public purpose, equitability, reasonableness, etc.) *a person may be deprived of his property as long as due process is followed – e.g. Notice ad hearing
Usual violations -taxes that are for private purposes -extra-territorial taxation -arbitrary or oppressive methods used in assessing and collecting taxes Other violations -tax amounts to confiscation of property -tax law applied retroactively and imposes unjust and oppressive taxes
-tax law is a violation of the inherent limitations B.) Equal Protection Clause -taxes must be uniform -all persons similarly situated of the same class must be taxed the same -all persons are equal in the burden of paying taxes but the rates are not -there must be a valid classification a. it must be based on substantial distinctions b. must apply to present and future conditions c. must be germane to the purpose of the law d. must apply equally to all C.) Progressive Taxation -this required by the constitution, as opposed to the regressive system of taxation which is not allowed -when a person’s tax base is progressing, tax rate also increases D.)Poll Taxes -community tax certificates -no person shall be imprisoned for non-payment of poll taxes -penalty, as opposed to imprisonment may be imposed for non-payment of poll taxes; interests, surcharges, and other penalties may be imposed E.) Veto Power -the president may either veto or approve a tax bill -partial veto only applies to General Appropriations Acts, revenue and tariff bills Tax laws could either be: -general tax law coming from congress -tax ordinance imposed by LGUs WHAT IS A TAX? -it is an enforced proportional contribution from persons and property, levied by the state by virtue of its sovereign for the support of the government and for its public needs -taxes are enforced contributions because it is an obligation created by law -it is proportional in character since taxes are based on one’s ability to pay *taxation is a mode of raising revenues while taxes are enforced contributions. SOURCES OF TAX LAWS -The Constitution -Tax legislations, these are tax laws that has the effect and force of a law -tax ordinances DOUBT AND VAGUENESS IN TAX LAWS -to be interpreted in favor of the tax payer and strictly against the state Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law -however, in tax exemptions and deductions, it is otherwise CLASSIFICATION OF TAXES Fixed amount imposed on individuals, whether citizens or not, residing within a specified territory, without regard to their property or occupation Imposed on property, real or personal, in proportion to its value
Excise taxes – a tax on the exercise of a right, privilege, or performance of an act DIRECT INDIRECT
A tax for which a tax payer is directly liable Primarily paid by persons who can shift the burden upon someone else
SPECIFIC AD VALOREM
Imposed based on weight or volume capacity or any other physical unit of measurement Based on the selling price or other specified value of the goods
The rate increases as the tax base increases The rate decreases as the tax base increases
Imposed by the national government Levied and collected by the local government Imposed solely to raise revenue for the government (e.g. income tax, donor’s tax, estate tax, VAT) Imposed and collected to achieve a particular legitimate objective of the government (e.g. oil price stabilization fund)
INTERPRETATION OF TAX LAWS A.) Strict Construction -tax laws are construed strictly against the state and in favor of the tax payers B.) Liberal Construction -this applies on tax exemptions and deductions -tax exemptions and deductions are liberally construed in favor of the state but strictly construed against the tax payer claiming exemption or deduction. -why? Presumption of taxability of income; burden of proof is on the tax payer
TAX LAWS ARE PROSPECTIVE -tax laws are civil in nature. Thus, it must be applied facing the future. However, retroactive application of revenue laws may be allowed if it will not amount to denial of due process. There will be a violation of due process when the tax law imposes harsh ad oppressive taxes. TAX PAYER’S SUIT
-the prevailing doctrine in the taxpayer’s suit is to allow taxpayers to question contracts entered into by the national government or GOCCs allegedly in contravention of law -significantly, a taxpayer need not be a party to the contract to challenge its validity Grounds: -illegal expenditure of public funds or money -public money is being deflected to any improper purpose -wastage of public funds through the enforcement of an invalid or unconstitutional law -public funds are illegally disbursed TAX EVASION versus TAX AVOIDANCE
-connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes -a scheme used outside of those lawful means and when availed of, it subjects the taxpayer to further or additional civil or criminal liabilities -a legal means used by the taxpayer to reduce taxes -a tax saving device within the means sanctioned by law
DOUBLE TAXATION -allowed by the constitution, however, if the resulting effect is confiscatory, excessive or oppressive in nature, then the tax law must be stricken down Kinds: a.) Direct Double Taxation Elements: 1. Taxing twice (but not all that are taxed twice is double taxation 2. Authority which imposes it could either be the same or different (National Government or any Political Subdivision) 3. Same purpose 4. Same taxable period b.) Indirect Double Taxation -one element is missing -this is allowed DOES THE POWER TO TAX INCLUDE THE POWER TO DESTROY? -the general purpose of taxation is to raise revenues for public purpose. The power of taxation Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law is an ever evasive power such that the state may choose to impose taxes arbitrarily upon a tax subject. However, this power must be exercised with caution to minimize injury to the propriety rights of tax payers. -While it is believed that taxation includes the power to destroy, it is by no means unlimited. If a tax law is so great that an abuse is manifested as to destroy natural and fundamental rights which no free government could consistently violate, it is the duty of the judiciary to hold such tax law unconstitutional.
PART 2: INCOME TAX LAWS PREVAILING CODE OF TAX LAWS -R.A. 8424, National Internal Revenue Code of 1997, effective January 1, 1998 *as amended by R.A. 9504, effective July 2008 -P.D. 1464 Tariffs and Customs Code of 1978 INCOME TAXATION -Involves the kind of taxpayers ought to comply with the provisions of the tax laws. -Income may be derived within or outside the Philippines; the nature and kind of income subject of taxation depends on the classification of the tax payer
INDIVIDUAL TAXPAYERS A.) RESIDENT CITIZENS (RC) -citizens of the Republic of the Philippines (RP) residing in the Philippines for a period of 180 days for a complete taxable year -their income from all sources derived within and outside (without) the Philippines are taxable B.) NON-RESIDENT CITIZENS (NRC) -citizens of RP acquiring contracts or jobs outside the Philippines for a period of more than 180 days -their works requires the physical presence outside the RP -their income derived within RP is taxable C. RESIDENT ALIENS (RA) -aliens residing and staying in RP who abandons his own country and has no intentions of returning -who are deemed to be RAs: foreign individuals staying for a period of more than 1 year from date of arrival -taxable within and without D. NON-RESIDENT ALIENS ENGAGED IN TRADE OR BUSINESS (NRA-ETB) -those aliens not permanently residing in RP; their intention being here is done habitually for profit. -they are engaged in trade or business in RP -taxable within
E. NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS (NRA-NETB) -Q: Is it possible that a NRA receives income while he or she does not engage himself in trade or business? A: Yes. NRAs may derive income in RP when he is commercially engaged but the same is not habitually done for profit in RP (best examples: Concerts of foreign artists -taxable at a flat rate of 25% and with no deductions at gross F. SPECIAL ALIENS -these are aliens having preferential income tax rate of 15% on their gross compensation income from sources within RP -These employees are aliens employed by a.) regional or area headquarters and regional operating headquarters of multinational companies in RP b.) offshore banking units established in RP c.) foreign service contractor or sub-contractor engaged in petroleum operations in RP CORPORATIONS AS TAXPAYERS For purposes of income taxation, the tax code also includes partnerships as corporations who are subject of taxation. XPN: General Professional Partnership (GPP) -these are individuals exercising their profession who pull their resources for profit and distribute their income among themselves -GPPs are not subject to Income tax as Corporations because it is the individual who is liable to pay their own income tax A.) DOMESTIC CORPORATIONS -created under Philippine laws -taxable within and without B.) FOREIGN CORPORATIONS -corporations organized or formed under laws of a foreign country even if wholly owned by Filipino citizens 1.) Resident Foreign Corporations (RFC) -a foreign corporation engaged in trade or business within RP. They are not actually residing in RP but it only happens that they have business operations in the Philippines. (e.g., Philippine branch of a Foreign Corporation) a.) RFC Not Engaged in Trade or Business -regional or area headquarters pursuant to E.O. 226, as amended by R.A. No. 8756 -representative offices and regional warehouses of multinational corporations in RP -exempted from income tax because they are supposed not to engage in trade or business in RP and thus do not derive income from the Philippines Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law b.) RFC Engaged in Trade or Business GENERAL RULE: subject to 30% Normal Corporate Income Tax (NCIT) based on their net taxable income from sources within, unless 2% of Minimum Corporate Income Tax (MCIT) [computed at 2% of their gross income within] is higher than the NCIT XPN: a.) regional or area headquarters and regional operating headquarters of multinational companies in RP – 10% preferential income tax b.) offshore banking units established in RP – taxed on their onshore interest income at 10% final withholding tax 2.) Non-Resident Foreign Corporations -foreign corporations not engaged in trade or business within the RP but deriving income from sources within the Philippines -unless otherwise provided by the Tax Code, the amount paid to as income by a NRFC is subject to 30% withholding tax by the Philippine payor 3.) International Air Carriers -subject to a flat rate of 2.5% at gross income 4.) Educational Institutions (EI) -they are special corporations a.) Non-stock, non-profit EIs -exempted from income tax b.) Proprietary EIs -for Proprietary EIs deriving income from unrelated business activities or transactions which do not exceed 50% their gross income from all sources, their income tax rate is 10%, otherwise, they are subject to NCIT (the predominance test)
Q: What are the two kinds of exemptions? A: 1.) Personal Exemptions 2.) Special Additional Exemptions 1.) Under R.A. 8424 (effective Jan. 1, 1998) a.) Personal P32,000.00 Married P20,000.00 Single P25,000.00 Head of the Family -an unmarried or legally separated individual who has the following dependents: -with 1 or both parents -with 1 or more sibling, legitimate child, recognized natural child, or legally adopted child who are not more than 21 years of age, unmarried and not gainfully employed, or if older than 21, he or she is incapable of self-support because of mental or physical defect.
-a senior citizen receiving an annual income not more than P60,000.00 -dependent/s is/are living with and dependent upon him for his/their chief support b.) Special Additional Exemptions P8,000.00 per child up to 4 children only 2.) Under R.A. 9504 (effective July 2008) a.) Personal Exemption P 50,000.00, without regard to status b.) Special Additional Exemptions P 25,000.00 per child up to 4 children only Q: Are aliens allowed to claim exemptions? A: Yes, provided that the country of the alien also grants exemptions to Filipino taxpayers in their country. This is consistent with the reciprocity principle Q: In taxable year 2008, how should be the exemptions applied? A: from January to June 2008, half of the value of exemptions granted under RA 8424; likewise, in July to December 2008, half of the value exemptions granted under RA 9504. Q: Among married couples, who can claim Special Additional Exemptions? A: Generally, the husband Q: Under what circumstances can the wife claim SAEs? A: -when the husband executes a waiver as signed by the his employer, if employed -when the husband is not gainfully employed or do not have any income -husband is living abroad Q: How about if the spouses are legally separated or annulled? A: the award of custody of children must be invoked. If there is no custody of children awarded in the decree of legal separation or annulment, the best procedure is to talk with the former spouse as to who shall claim the deduction so a single child will not be covered twice by an exemption *analysis: the status of an individual who is annulled from his or her former spouse becomes single. Thus, they may live on each other’s lives and create two separate households. They may take advantage of having 4 dependents each provided that the effect of annulment in the status of children is legitimate. However, in legal separation, the marriage is not severed. Thus, only up to 2 dependents each may be claimed by each of the former spouses.
Q: Can Exemptions be applied if a person changes his status and/or acquire dependents in the same taxable yea?
Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law A: Yes. The general rule is that whatever may be favorable to the taxpayer can be availed of as to the application of exemptions. The change of status and/or the acquisition of new dependents will have a retroactive effect from the start of the taxable year even if the change of status and/or acquisition of new dependents happen at the last day of the taxable year.
III. TAX BASE Taxable Income When is Income Taxable? (Conditions) a.) There is income, gain or profit; b.) The income, gain or profit is received or realized during the taxable year; c.) The income, gain or profit is not exempt from income tax. -requisites of a taxable income are important to determine what kind of tax is an income (i.e., taxable base that could either be passive, compensation or business) as well as the correct tax rate to impose Rule of thumb: every income from whatever source (legal or illegal) is taxable -for individual tax payers, Calendar year is followed for income tax purposes Income Realized Illustration: A contract of lease was executed on November 2005. The payment for lease is P5,000.00 per month to be paid on the termination of the contract on March 2006. Thus, the total income realized in taxable year 2005 is P10,000.00 albeit being actually received on March 2006. If an income, gain or profit is realized but was not declared by the tax payer -the taxpayer is guilty for under declaration of income tax which may subject him to assessment by the BIR
PASSIVE INCOME -subject to final withholding tax -income is taxed before the taxpayer received the said income Q: Is Passive Income Taxable? A: Yes, because it is subject to final withholding tax which is paid before the taxpayer receives the said income KINDS OF PASSIVE INCOME 1.) Interests earned from bank deposits a.) gross interest from foreign currency deposits with an Offshore Banking Unit or Foreign Currency Deposit Unit : 7.5% b.) local currency deposits : 20%
2.) Royalties on books, literary works, and musical compositions : 10% 3.) Prizes a.) If amount is more than P10,000.00, 20% final tax Who shall pay? The person who gave the prize b.) If amount is less than P10,000.00, it is only subject to income tax 4.) Winnings -20% final tax regardless of amount Who shall pay? The person who gave the winnings 5.) Cash and Property Dividends Requirements: Cash dividend or property dividend Received by an individual tax payer From a domestic corporation 6.) Capital gains from shares of stock (not listed or traded) Primary considerations: if there is income - taxable o greater than P100,000.00, 10% o less than P100,000.00, 5% no income - not taxable 7.) Capital gains from sales or exchange of real property located in the Philippines 6% capital gains tax, based on the selling price or zonal value of the property, whichever is higher regardless whether there is no income realized, gain is presumed who shall pay – generally, the seller; unless otherwise stipulated by the parties in the contract 8.) Gain on sale of Capital Asset It falls under Non-Compensation Tax Losses are also paid the capital gains tax However, if there loss on sale of capital asset, it can be included in the deductions of the tax payer
COMPENSATION INCOME -This is included in the taxable income -These are the income received by an individual out of an employer-employee relationship -Services rendered where there is income derived -Salaries, whether received monthly or periodically -Wages, whether paid by hour or daily -Commissions, where there is a certain percentage received by an individual from sales or a certain quota Transportation allowance/ Lunch Meeting -it depends: Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law If subject to liquidation in pursuit of the business of the employer, not part of CI If the expenditure is discretionary, part of CI Tips received in restaurants, hotels, etc. Theoretically, this is included in CI. However, there is no paper trail since most of the tips are given secretly as an act of gratitude to services rendered. Thus opens the tendency not to declare them Tip Box visible in the establishment - with much reason to declare
Individuals receiving income from purely compensation income -need not file an Income Tax return (ITR) because it is the employer that pays for you (this is called substituted filing of ITR) FRINGE BENEFITS -any benefit granted to an employee in addition to their basic salaries -this can be claimed as deductions by the employer -prior to 1997, there is no tax provisions recognizing fringe benefits -this is subject to final tax to be paid by the employer -if the FB is given in cash, there is no problem as to its declaration FB received by Managerial or Supervisorial employees are not part of the CI However, FB received by rank and file employees are part of their CI FB paid to Managerial or Supervisorial employees by employers can be claimed as deductions under the following formula: Grossed-up Monetary Value (GUMV) x (32)%, where GUMV = FB/(68)% Vehicles bought for the employee FB Valuation is 100% If paid in installment: Acquisition Cost / 5 Years; 5 years is a generally accepted period of installment Driver provided to the employee or for the business the wage of the driver is a business expense that can be included in the deductions of the employer for purposes of income tax Housing If acquired by the employer for the employee, 5% of the zonal value x 50% is subject to final tax Rentals paid for the employee, 50% of the rental fee can be claimed by the employer as deduction Household expenses for the employee - FB Expense Account or Sign Cheat if given in pursuit of the business of the Employer to the Employee, not considered FB
Q: Are all FB subject to Taxation? A: Yes, because there is a need to identify FB to determine whether it falls under the classification of FB received as an Income or FB received by an employee that can be added to the deductions of the employer for purposes of income taxation. Q: When is FB not subject to tax? A: General Rule: FB is subject to Compensation Income Tax XPN: given in pursuit of the business of the employer FB is for the advantage or convenience of the employer If the benefit is classified as “deminimis” (relatively small valued benefits) Q: What are the kinds of Deminimis Fringe Benefits? rice allowance of up to P1,500.00 per month conversion of leave benefits to cash not exceeding 10 days uniform allowances of up to P4,000.00 per annum or service awards during awards anniversaries not exceeding P10,000.00 meritorious benefits not exceeding half of the salary received by the employee Bonuses not exceeding P82,000.00
BUSINESS INCOME Income derived from trade or business. This encompasses all kinds of business for purposes of profit, whether legal or illegal. Income derived from business is subjects of taxation Examples Service Business, where the tax payer is not an employee (Barbershop, Spa, etc.) Food Businesses Merchandising – purchasing commodities in final form but sells the products to the public with a mark-up price Manufacturing – making of a product and selling it to people Professional fees/Practice of profession Construction businesses – reporting of income is required for income tax purposes Income from farming – this includes income derived from livestock and poultry; sale of crops, trees, fruits; as well as farming equipment Interests or compensation fee derived from lending money, regardless if it is against the usury laws or is an illegal business of lending Rental or Lease Fees for the use of properties Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law However, improvements introduced by the lessor should be identified whether it would remain as the property of the lessor at the end of a contract. If it is a permanent improvement, then it is subject to income tax choosing between: o Outright method o Spread out method Illustration: A lessee introduced an improvement in the property of the Lessor (fence that is worth P80,000.00). the rental of the property is P120,000.00 per annum for a period of 5 years. The said improvement was introduced on the second year. A.) Outright Method 1.) P120,000.00 2.) P200,000.00 (120k + 80k) 3.) P120,000.00 4.) P120,000.00 5.) P120,000.00 B.) Spread-out Method 1.) P120,000.00 2.) P140,000.00 3.) P140,000.00 4.) P140,000.00 5.) P140,000.00
Dividend Income, this could fall under passive income if it passes the requirement stated in #5 under passive income section above.
GAIN ON SALE OF CAPITAL ASSETS -this is different from the 6% capital gains tax which is considered as Passive income -this is to be treated as compensation income Asset Sold Ordinary Asset – assets of taxpayer which are ordinarily sold in the operation of its business. Capital Asset – not primarily intended to be sold because the asset is essential to the use and operation of the business Examples: 1.) Car Dealing - showroom cars are ordinary assets; cars owned by the car dealers are capital assets. 2.) Selling of Computers – printers, laptops, and other computer gadgets intended to be sold are ordinary assets; computers used in the business operation for its use and convenience are considered capital assets Income from trade or business -100% taxable -if what has been sold is a Capital Asset, and there is gain, it is taxable
Determination of Taxability HOLDING PERIOD – the time of purchase to the time of selling
If sold within 12 months from the date of purchase (short term) – 100% taxable o Sold more than 12 months from date of purchase (long term) – gain declared is 50% taxable The presumption for the sale of capital asset is always sold within 12 months (short-term) o
HOW TO DETERMINE GAIN Acquisition Cost - Selling Price If the gain in sale of capital asset does not equate a gain but a loss, it can be considered as a deduction in the taxable income Rule of thumb: every income from whatever source (legal or illegal) is taxable Receivables – money expected by a taxpayer from his debtors Payables – money to be paid by a taxpayer to his creditors because of a debt he owes to them Presumption: not all receivable will be collected. If a receivable from a debt owed to by a debtor, for any reason, cannot be collected – they are called BAD DEBTS BAD DEBTS are those receivables that cannot be collected. They are allowed deductions for purposes of income tax. This happens when a taxpayers exhausted his efforts as well available legal remedies in collecting his credit from his debtor/s. However, bad debts recovered, after the said deduction were declared should be considered income on the part of the tax payer which will be subject to tax. ITEMS EXCLUDED AS GAINS (Sec. 32, NIRC) 1.) Proceeds from life insurance Conditions: Insurance is to be paid for the debt of an insured person The tax payer is the beneficiary (as distinguished from the deceased person who is insured) Insurance is payable upon the debt of the insured However, if the proceeds of the insurance were invested (e.g. proceeds were invested in a mutual fund), and the investment incurred a gain, the income is subject to taxation 2.) Proceeds from insurance, but beneficiary is the insured -on due date, the tax payer’s return of premium is exempted from income tax 3.) Bequests and Devices -a share in the inheritance of a taxpayer, whether cash or in kind: exempted from income tax Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law (Note: that part of the share of the inheritance is exempted; however, the Testate/Intestate Estate is subject to taxation) 4.) Gift Tax -these are gifts presumed to be given gratuitously Donor’ s Tax – paid by the donor. In effect, the done is exempted 5.) Compensation for injuries or sickness -in cash or in kind, exempted However, if what has been given is an equivalent of a taxpayer’s compensation income (as if may sweldo) – TAXABLE 6.) Inherent Limitation: for international comity -same tax rate as to other countries with respect to aliens in RP and Filipinos in other countries 7.) Pensions -example: return of premium from GSIS and SSS Pensions are not taxable under the law Requirements for exemptions upon in-house retirement plan given by private companies: Retirement plan must be approved by the BIR Retiring tax payer must at least be 50 years old Service in the company for at least 10 years *Absence of one requisite will render the receivable income taxable
8.) Separation Pay due to sickness, death, or disability -if separation is beyond the control of the taxpayer, separation pay is exempted -VOLUNTARY RESIGNATION, taxable 9.) Prizes and awards in Recognition there must be no action on the part of the taxpayer to enter the religious, charitable scientific, education, artistic, or literary contest. He must also be not required to render substantial future services as a condition to receiving the prize or award. – excluded from taxation 10.)
11.) Inter-corporate Dividends When: dividends are transferred from a domestic corporation to another domestic corporation
NORMAL CORPORATE INCOME TAX (NCIT)
Gross Income Less: Deductions ___________________________ ____________________
MINIMUM CORPORATE INCOME TAX (MCIT); GROSS CORPORATE INCOME TAX (GCIT) MCIT - Rate: 2% at gross Q: When is MCIT applicable? A: it is applicable upon Domestic Corporations and Foreign Corporations Engaged in Trade or Business th in the 4 year of business operations or more there is net loss or zero taxable income or NCIT is less than MCIT ILLUSTRATION: Gross Income Deductions Net Income NCIT (% of NI) MCIT (2% of GI)
4th Year 5th Year P1.5M P 2M P1.4M P1.9M P100k P100k P35,000 P35,000 P30,000 P40,000
6th Year P2.5M P2.3M P200k P70,000 P50,000
* highlighted values means that the specified amount is the tax due
Carry over of losses: excess of payment is valid for 3 consecutive taxable years GCIT –rate: 15% -this is only an option. Election of the GCIT needs to be approved by the Secretary of Finance Applicability of GCIT -Corporations whose ratio of cost of sale to sale does not exceed 55% Illustration: Sale 1Million 1Million Less: Cost of 400k 750k Sale _____________________________________________
Net Sale Cost of Sale _______________________________________________
=75% not qualified
GCIT must be applied for 3 consecutive taxable years Improperly accumulated earnings tax is subject to a penalty of 10% -why improper: because the same should be distributed as dividends XPNs (justified reasons for retaining earnings): due to expansion acquisition of another related business additional working capital
= Net Income X (fixed or graduated rate) % _________________________________________
=Taxable income Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law COMPUTATIONS 1.) Purely Compensation Income
Compensation Income Less: exemptions (personal or special additional) ____________________________ ___________________
= Net Income X (fixed or graduated rate) % _________________________________________
= Net Income X (fixed or graduated rate) % _________________________________________
IV. DEDUCTIONS Q: Why does the tax code allow deductions? A: to be fair to the taxpayer. The tax code recognizes that as a person receives income he or she also spends or incur expenses. *Deductions made by a taxpayer should always be within the limits provided by law – Authorized deductions Kinds of Deductions Itemized Deduction Optional Standard Deduction (OSD) o this is without regard to the expenditure of the tax payer o based on gross sales/receipts of the taxpayer; a taxpayer may deduct up to 40% Q: Can a taxpayer claim OSD lower than 40% A: Yes, because theoretically, the tax code allows it. However, this is almost impossible because a taxpayer would always want to claim higher deductions so as to pay lower taxes. Who can Claim OSD? Citizens Resident Aliens Corporation subject to Regular Corporate Income Tax Who cannot claim OSD? NRA NETB Citizens/RAs whose income are coming purely from compensation income Election of OSD is irrevocable such that once the option is chosen, it can no longer be withdrawn.
ITEMIZED DEDUCTIONS Listing one by one the expenses incurred when earning the income XPN: income coming purely from compensation income A.) GENERAL BUSINESS EXPENDITURES -the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer ’ s trade or business CONDITIONS: It must be paid or incurred during the taxable year (the same principle on income realized is included here) The expenses must be ordinary and necessary o Ordinary – payment which is normal in relation to business of the taxpayer and the surrounding circumstances o Necessary – expenditure is appropriate or helpful in the development of the taxpayer’ s Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law business or that the same is proper for the purpose of realizing profit or minimizing loss Must be substantiated by documentary evidence -if there is none, sorry. XPN: bad debts Engagement in business is the act of being in a commercial activity which is habitually done for profit B.) UTILITIES -as to payment of water, electric bill, and others C.) SUPPLIES -this must be supported by adequate invoices or receipts -best evidence: a VALID Official Receipt (O.R.) D.) NECESSARY REPAIRS -includes major repairs -if it adds value to the property, the improvements would be capitalized (either outright or spread out) for purposes of taxation D.) INTEREST EXPENSE Requirements: There must be a debt An interest expense was paid or incurred by reason of the debt Indebtedness is connected with the taxpayer’ s trade Interest expense is stipulated in writing It must be legal However, even if all the requirements are met but the interest expense are paid to a related taxpayer, this deduction cannot be claimed Related taxpayers are as follows: Between family members o Brothers and sisters o Spouse o Ancestors and lineal descendants Between an individual or a corporation more than 50% in value of the outstanding stock of which is owned, directly and indirectly, by or for such individual Between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly and indirectly, by or for such individual Between the grantor and a fiduciary of any trust Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust Between a fiduciary of a trust and a beneficiary of such trust If a taxpayer has passive income for interest in bank deposits, a taxpayer must reduce it to 38%
How to claim Interest Expense: Outright Method – claim entirely as interest expense on the year of purchase Capitalization or Spread-out Method – depending on the period the expense is made E.) BAD DEBTS -receivables of a tax payer may or may not be collected -these are debts that can no longer be recovered Proof of worthlessness of the receivables must be ascertained. The BIR may disallow the deduction if the receivable is not related to the trade and business; the said bad debt is not deductible. Generally, it is undisputed that there is a useful period for every asset or resource. The acquisition cost of an asset depreciates as time goes by F.) Depreciation –It is the gradual diminution in the useful (service) value of tangible property used in trade, profession or business resulting from exhaustion, ordinary wear and tear, and obsolescence. Importance: by using the property, a gradual sale is made out of it, and the depreciation change is a measure of the cost which has been sold Requisites: The allowance for depreciation must be reasonable o Depreciation is a question of fact and is not measured by theoretical yardstick. Reasonableness depends upon the conditions known to exist at the end of the period for which the return is made It must be for the property used in trade or business or profession Kinds Tangible property used in Trade or business allowance Intangible property like patents, copyrights and franchises G.) Depletion – exhaustion of natural resources like mines and oil and gas wells as a result of a production or severance from such mines or wells. Importance: as the product of the mine is sold, a gradual sale is being made of the taxpayer’ s capital interest in the property. The purpose is then, to enable a taxpayer to recover that capital interest free of income tax at its cost or on some other basis Requisites Depletible asset – natural resources: mines, gas and oil wells Charged off within the taxable year For Domestic Corporations – oil, gas wells or mines located within and without Resident Corporations – gas wells and mines located within the Philippines Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law H.) TAX CREDIT -This is applicable to taxpayers within and without: Domestic Corporations and Resident Citizens -paying of taxes must be imposed only once on a single source of income; otherwise, there would be double taxation -this applies to income from sources without and taxes was paid in the country where it was obtained. Requirements: Documentation of tax that was paid Clear indication in the tax return that he is claiming tax credit Limitation of Tax Credit
Taxable Income W/in ___________________________________________________________________________________________________________
X Phil. Income Tax
Taxable Income w/in and w/o *The obtained result will be compared with the tax being claimed as a credit. Whichever would be the lower value, the said lower amount can be claimed as tax credit.
LOSSES Ordinary Business Losses -because of force majeure Casual Business Losses -casualties, etc Requirements for claiming as deductions: Incurred within the taxable year Not compensated by insurance o If partially compensated, that part which was not covered by the insurance can be claimed as deductions Losses is reported to the BIR in a sworn statement within 45 days from the date of discovery o Other necessary attachments includes (but not limited to) Police report, NBI report J.) Operating Loss -this happens when income from operation is less than the income incurred Q: Does operating Loss automatically equate to Net loss? A: No, because a tax payer may still have other sources of income A taxpayer cannot declare a net loss because the tax code already allowed a tax payer to deduct operating losses. NET OPERATING LOSS CARRY OVER -this is allowed for 3 consecutive taxable year -to discourage business to incur losses because no one would want to lose their business
K.) LOSS ON SALE OF CAPITAL ASSET -as previously discussed, this is a deductible expense -Holding period More than 12 months : 100% deductible Less than 12 months: 50% deductible Capital Loss Carry Over -also applicable for 3 consecutive years L.) LOSSES ON WASH SALES -This is not deductible, but gain on wash sale is taxable Wash Sale – involves shares of stock that is bought or sold (period: within 60 days) Presumption: if this is the case, then the business involved by the tax payer is buy and sell of shares of stocks M.) CHARITABLE CONTRIBUTIONS Requirements: Taxpayer must be engaged in trade, business or practice of profession Actual payment or proof of payment is presented Recipient must be listed by the tax code The net income asset of which shall belong solely for the benefit of any member, organization, officer or any specific person N.) RESEARCH AND DEVELOPMENT EXPENSES -continuous development of a business products, goods, and others -this is common among pharmaceuticals, food industries and liquor industries -since R&D is a huge chunk on the expenses of these businesses, they are allowed to use the Outright and Spread-out Expense Methods.
PART 3: ADMINISTRATIVE PROVISIONS Q: What is an Income Tax Return (ITR)? A: It is a document which evinces a declaration under oath of a taxpayer’ s income and its necessary computation in arriving to the income tax due to be paid Q: What is the end result of filing an ITR? A: Tax payable by the tax payer. The BIR being so interested with what the taxpayer will pay Q: Are all individual taxpayers required to file and ITR? A: As a general rule, all individual taxpayers must file and ITR XPN: When the individual’s income is lower than the allowable deductions Minimum wage earners Taxes already withheld by employers Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law
Individuals receiving purely compensation income which is less than the deduction at gross Individuals receiving purely passive income As an inherent limitation, giving due respect to international comity
Q: is the XPN applicable to Corporations? A: No, Corporations incurring net losses should still file an ITR. The presumption is that corporation are already in the fourth year of operation. Thus, they are required to pay using the MCIT. SUBSTITUTED FILING -The filing of ITR was done by the employer because his taxes are presumed to be properly withheld. WHERE TO FILE: Filing only: Regional District Offices of BIR Electronic filing system WHERE TO PAY Authorized banks -for Corporations, they may elect their principal place of business or the place of the legal residence of the corporation. Generally, a corporation elects his principal place of business (Main branch) -if taxpayer as no Main branch: Central office of the BIR -if there is no authorized bank: to the local treasurer’ s office -rural banks are not allowed to receive payment of taxes -in the past, it is the District offices which receive payment of taxes RULE OF THUMB: “Pay as you file” File and pay if there is payment Corporations may one of the two following taxable years: Calendar Year -when to pay: every first quarter of the year -to be paid on or before April 15 Fiscal Calendar -begins on the day of the first operation of the business -when to pay: on or before the 15 th day of the fourth month following the closing of the fiscal year Individual tax payers: Calendar year Individual taxpayers who are self-employed or in practice of a profession are required to file and pay estimated ITR every quarter 1st – on or before April 15 2nd - on or before August 15 3rd – on or before November 15 4th – within 60 days after the close of the quarter *this is because the next filing of ITR will be for annual income taxes
How should payment of taxes be made? -through cash -can be paid in installments: when the tax due is in excess of P2,000.00, the taxpayer (other than a corporation) may elect to pay in 2 equal installments First – at the time when the return is filed Second – on or before July 15 following the close of the calendar year Minors Earning Income -required to declare subject to the consolidation with the parent’ s ITR; if there is no parent, authorized agents In the case of Spouses -the default property regime is Absolute Community of Property -consolidated filing with separate computations Capital Gains Tax -payable within 30 days from the date of transaction (generally, it is when the document was notarized) DOCUMENTS, FINANCIAL STATEMENTS REQUIRED TO BE ATTACHED -if gross income is not more than P50,000.00 a quarter: simple statement of net worth of operation -if gross income is from P50,000.00 to P150,000.00 a quarter: no need to submit a financial statement -if gross income exceed P150,000.00: taxpayer needs an accountant SUBSTITUTED FILING Form 2416 : the copy of the individual Individuals receiving a purely Compensation Income: employer needs to summarize the compensation income paid to his employees including the tax withheld Conditions Personnel must only be receiving purely compensation income Received from only one employer (otherwise, the taxpayer must file a return) -in the case of spouses, they may qualify under this if they meet the requirements/conditions CONSEQUENCES OF NOT PAYING OR PAYING AFTER DUE DATE Imposition of surcharges Civil penalties (but it does not make the tax laws penal in character), imposed in addition to or on top of the tax due because of 2 reasons: o Delinquency: failure to pay the tax due on the due date fixed by law o Misrepresentation: declaration of false information or fraudulent returns done in Bad Faith because the ITR is a declaration under oath Surcharges: percentage on top of the tax due Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law 25%: failure to file the ITR on due date, or is filed at a wrong venue o after assessment: there is more surcharges to be paid o 50%: because of misrepresentation or willful neglect on the defect of the ITR or in representation of a false or fraudulent return There is a Fraudulent Return when: There is under declaration of income Over declaration of deduction or expenses How much: (The BIR Standard) -substantial of over or under declaration if there is a failure to report an amounting to 30% of the actual over or under declaration Interests -discretion of the BIR, other than the required surcharges -period of interest: from the date the law requires an individual to pay taxes to the date of actual payment -basis: tax which was not paid o
DEFICIENCY INTEREST -Is imposed for failure to pay on the date due in the notice after investigation or audit DELINQUENCY INTEREST -is imposed for the failure to pay the tax due on the date imposed by law
Other Penalties: o Fine o Imprisonment o Or both
ASSESSMENT It is a written notice and demand made by the BIR on the taxpayer for the settlement of a tax due liability It contains the following: Computation of tax liabilities Demand for payment within a prescribed period Time when penalties or interests begin to accrue against the tax payer For purposes of Income taxes, only the BIR can issue an assessment -the ITR plus its attachments is the document that can be assessed by the BIR What should a taxpayer do when he receives an assessment? -pay the amount stated plus the surcharges, interests, fines, and other charges stated therein May an assessment be issued even when the BIR does not receive an ITR? -as a general rule, an assessment is prima facie presumed correct and made in good faith. Absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed.
Verily, failure to present proof of error in assessments will justify judicial affirmance of said assessment After audit, examination, or investigation, the BIR may issue an assessment against a taxpayer Can an assessment be questioned in court? -No because it is appealable to the BIR, after which, the Court of Tax appeals may assume jurisdiction upon lapse of a certain period of inaction by the BIR or the decision of the latter is appealed before them. Assessment made by the BIR is jurisdictional -if made by the Regional District Office (RDO): valid within the district -if made by the main office of BIR: valid all over the RP *otherwise, an assessment may be erroneous
Is amendment of ITR filed allowed? -yes, but never to ask the BIR to return his original ITR filed -an amended ITR may be filed within 3 years from the time the original return was filed Basis or grounds for deficiency assessment: No ITR filed: resolution will go to the best evidence obtainable There was no amount declared as tax payable If a taxpayer failed to file an ITR but the taxpayer is not among those who are not required to file the same VOID ASSESSMENT Issued by a person not authorized by the BIR; the same is done to defraud or harass a taxpayer A tax return is a public record because it is filed with the BIR -it is a confidential document because any person cannot inquire into its details except those officers who have the power to assess a taxpayer -in fact, any public personnel divulging details of an ITR may be held administratively liable XPN: when confidentiality is set aside -waiver on the part of the taxpayer as authorized by the secretary of finance -generally, there is an implied waiver if the assessment protested in court BEST EVIDENCE OBTAINABLE -The BIR is empowered to access all relevant or material records and dates pertaining to the tax liability Record, data, information, papers, evidence, etc. in order to determine the proper income tax -this applies when a taxpayer failed to file an ITR or the ITR is fraudulently filed Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law
Declaration of presumptive gross income -meaning, the BIR disregards the ITR -if there is a reason to believe that the records of the business does not reflect the true income of the taxpayer -generally, because the taxpayer does not issue pertinent receipts of expenses Income from similar businesses of the same place -the average income of the tax payer lags behind from the other similar businesses
JEOPARDY ASSESSMENT -if the taxpayer absconds or tries to conceal properties, encumbrances, or performing any act of which the intention is to prevent a proceeding for tax assessment -this is the worst assessment that a taxpayer may receive SURPRISE AUDIT OF FINANCIAL STATEMENTS -books of accounts may be audited by the BIR by reason of assessment only -surveillance of businesses *in other words, the State may employ all possible measures to ensure that an assessment is done properly. However, only legal means to employ it must be exercised The BIR has the power to implement tax laws and enforce fines, and others -no court may validly intervene an assessment ASSESSMENT OF TAX LIABILITY, WHEN: A.) Three (3) Years – commences to run after the last day prescribed by law for the filing of the return. This means that if the return is filed before the due date, the prescriptive period begins to run only after said due date, but if the return is filed beyond the period fixed by law or beyond the due date, the 3 year period shall be counted from the day the return was filed -but if the ITR was amended substantially, the period starts from the filing of the amended return B.) Ten (10) Years When no return is filed The ITR is false or fraudulent with intent to evade the tax, the prescriptive period commences from the date of discovery ACCREDITATION OF TAX AGENTS -To give financial recognition to those engaged in tax practice Duties of a tax practitioner self-assessment of tax representation as to filing appearance for the taxpayer Why the need for accreditation? Because taxpayers are easily deceived by people pretending to be
employees of the government in order to solicit money from them. Who are qualified? Natural/juridical persons Those who have a law degree provided they have 18 units of accounting subjects or taxation Certificate of good moral character from 2 CPAs or 1 member of the IBP If the taxpayer itself appears, no need for a tax agent Members of the Philippine Bar need not apply for accreditation Tax assessment can be challenged -check validity as to who issued it (jurisdictional matters) -if a taxpayer believes that his self-assessment is correct, then he may challenge the assessment
REMEDIES A.) AVAILABLE TO THE TAXPAYER What to do: Be sure it is a valid assessment, it must not be void or erroneous No court may TRO a tax assessment Challenge the Assessment the taxpayer may choose or has the option to do this if he believes that his selfassessment is correct MOTION FOR RECONSIDERATION OR REINVESTIGATION -if this is availed, then an assessment becomes a disputed assessment Reconsideration: based on existing records Reinvestigation: presentation of additional evidence or documents Initial Remedy; When: -within 30 days from receipt of the assessment -it stops the clock of the period to collect the tax WHERE: from where it was issued RDO- can be appealed to the central office of BIR Appeal: within 30 days from receipt of the decision to the Court of Tax Appeals (CTA) -or within 30 days from the expiration of the 180 days from the time of filing because the BIR did not act on the appeal: elevation to the CTA -once filed before the CTA, the taxpayer needs a counsel because the case becomes judicial; in effect, the rules of court applies TAX COMPROMISE -entering into a settlement or consensual agreement of compromise -proving to the BIR that the taxpayer is financially incapable of paying assessed tax (clear and convincing evidence) Mario Fidel U. Danao 03/17/2016
Taxation I, Atty. Lilian C. Baribal-Co, University of the East College of Law -still there is a 10% surcharge of the basic assessed tax (as opposed to the misconception that there is nothing to pay) -proof of incapacity or incapability or hard to prove the misrepresentation or fraud However, any fraud to the said attestation will make the tax assessment plus the surcharges and fines immediately demandable Taxpayer may avail to prove that a tax collector is illegally disclosing the assessment or any act of graft or corrupt practices -RA 3019 administrative, criminal, civil liability on the part of the collector or personnel of the BIR TAX REFUND -Doctrine of equitable recoupment (however, this is not applicable in the Philippines): this is a mode of extinguishing tax liability wherein a tax refund is set-off against a tax credit *in the Philippines these two cannot be set-of: payment first before refund!!!! When to avail: -within 2 years from the date the tax was paid -there must be proof of actual payment to the tax as evidenced by receipts -declaration of erroneous or illegal assessment -attestation to the reason of illegality and actual payment
-difference with distraint and levy: the bidder awarded the property cannot encumber the same because of the one year redemption period in favor of the taxpayer (if it is a real property) 3.) The state may file Criminal cases or civil penalties against the tax payer -it does not make tax law penal -exoneration on the civil liability does not terminate the criminal liability Books of accounts – proof of the financial statement of the taxpayer: must be maintained in English, Filipino, Spanish, or the local dialect Prescriptive period to collect -if there was assessment: 5 years from date of assessment; this stops when the assessment is disputed -if there was no assessment but there was ITR , 5 years from the date fixed by law -if no return filed, if there was return but the same was fraud, 10 years from the date of discovery -if the decision became final, the prescriptive period will start to run; with respect to the filing of the suit, the prescriptive period is suspended
B.) AVAILABLE TO THE STATE Taxes are paid generally in money. Thus, it can be paid in kind but this is not principally done as it will create problems as to its administration (contrary to the Canon of Taxation: Administrative Feasibility) 1.) Distraint of Personal Property -this can be availed if a taxpayer has no available cash to settle the tax and the taxpayer has “personal properties” that can be auctioned -property to be auctioned must be equal to the tax liability, surcharges, etc. plus the expenses of the auction -excess will be returned to the taxpayer -notice of sale shall be informed or delivered to the taxpayer to give chance to the taxpayer to purchase the property -during auction, the taxpayer may bid -if in any case, the proceeds of the auction is not equal to the liabilities, taxpayer is still not cleared 2.) Constructive Distraint -the BIR will require the taxpayer to sign a document stating that the property should be preserved and to remain unaltered or encumbered Procedure: by public auction -notify the Register of Deeds where the property is registered Mario Fidel U. Danao 03/17/2016