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Reviewer in Taxation (Lifted from San Beda Reviewer 2012) DISTINCTIONS GENERAL PRINCIPLES Comparison of Power of Taxation with

Other Inherent Powers Taxation Police Power Eminent Domain Purpose To raise revenue To promote public To facilitate the welfare through taking of private regulations property for public use Amount of Exaction No limit, but as Limited to the cost No amount much as possible, of regulation, imposed but rather must be equal to issuance of the the owner is paid the needs of Govt license or the market value of in order to avoid a surveillance (fee) the property taken deficit scenario for the State. Benefits Received No special or direct No direct benefit is A direct benefit benefit is received received; a healthy results in the form by the taxpayer, economic standard of just merely general of society is compensation to benefit of attained the property owner protection Non-Impairment of Contracts Contracts may not Contracts may be Contracts may be be impaired impaired impaired Transfer of property rights Taxes paid become No transfer but Transfer is effected part of public funds only restraint in its in favor of the State existence Scope All persons, All persons, Only upon a property and property, rights and particular property excises privileges Who Exercises the Power May be exercised May be exercised May be: only by the only by the a. Exercised by government or its government or its the political political government subdivisions subdivisions or its political subdivisions; b. Granted to public service companies or public utilities Debt Basis Based on Law Based on contract or judgement Failure to Pay Failure to pay tax (other than No imprisonment for nonpoll tax) may result in payment of debt imprisonment Mode of Payment Generally payable in money Payable in money, property, or Taxes

service Assignability Not assignable Assignable Payment Not subject to compensation or May be subject to set-off compensation or set-off Interest Tax does not draw interest Debt draws interest if unless delinquent stipulated or delayed Authority Imposed by public Authority Imposed by private individuals Prescription Determined by NIRC Determined by Civil Code Toll Definition Demand of sovereignty for the Demand of ownership an purpose of raising public amount charged for the cost revenue and maintenance of property used Purpose Taxes are levied for the support Tolls are compensation for the of the government use of anothers property Determination of Amound The amount of tax is The amount of the toll is determined by the sovereign determined by the cost of teh property or of the improvement Who may impose May only be imposed by the Imposed by the government or State private individual Special Assessments Definition Imposed only on persons, Special levy on the lands properties, and excises comprised within the territorial jurisdiction of a province, city, or municipality specially benefited by the public works projects or improvements funded by the LGU concerned Subject Taxes are levied on land, Levied on land persons, property, income, business, etc. Liability Personal liability of the tax Cannot be made a personal payer liability of the person assessed Basis Based on necessity and Based solely on benefits partially on benefits Applicability General application Special application only as to a particular time and place License Fee Basis Based on the power of taxation Based on police power Purpose Purpose is revenue Purpose is regulation Limitation on Amount Page 1 of 6 Tax Taxes Taxes

Amount is unlimited

Amount is limited to the cost of: 1. Issuance of license 2. Inspection and surveillance When paid Normally paid the start of Normally paid before the business commencement of business Surrender Taxes, being the lifeblood of License fee may be with or the State, cannot be without consideration surrendered except for lawful consideration Effect of non-payment Non-payment does not make Non-payment makes the the business illegal but may be business illegal ground for criminal prosecution Penalty Definition Enforced proportional Sanction imposed as a contributions from persons and punishment for violation of law property or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Purpose Intended to raise revenue Designed to regulate conduct Authority May be impose only by the May be imposed by the: government 1. Government 2. Private individuals or entities Tax All embracing term to include various kinds of enforced contributions upon persons for the attainment of public purpose Tax Basic imposition on persons, property and excises Tariff A kind of tax imposed on articles which are traded internationally Tax

Minimization of taxes

Effect Almost always results in the absence of tax payments INCOME TAX

Income Denotes a flow of wealth during a definite period of time. All wealth other than as a mere return of capital. Service of wealth Income is subject to tax Fruit Taxable Estate The taxable income shall be determined in the same way as that of individuals, but with a special deduction for any amount of income paid, credited, or distributed to the heirs

Capital Fund or property existing at one distinct point of time, which can be used in producing goods or services Wealth Return or capital is not subject to tax Tree Taxable Trust The taxable income shall be determined in the same way as that of individuals but with: A special deduction for any amount of income paid, credited, or distributed to the heirs A special deduction for any amount of the income applied for the benefit of the grantor The exemption is 20,000 The income tax rates for individuals apply. There is a creditable withholding tax on the heir of 15%. The income tax return shall be filed if the gross income is P20,000 or more and the tax paid by the fiduciary.

The exemption is 20,000 The income tax rates for individuals apply. There is a creditable withholding tax on the heir of 15%. The income tax return shall be filed if the gross income is P20,000 or more and the tax paid by the executor or administrator. Share of A Partner in GPP

Compromise Penalty Collected as a compromise in cases involving violations of the Tax Code, rules or regulations Subsidy A legislative grant of money in aid of a private enterprise deemed to promote the public welfare Revenue A broad term that includes not only taxes but income from other sources as well Tax Evasion

If net income, it shall form part of the gross income of each partner based on his agreed ratio subject to 10% creditable withholding tax.

Tax Levied by the law making body of the State for the support of the government and for public needs Tax A source of revenue of the government

If net loss, it may be taken by the individual partner in his return of income. Payments made to a partner for services rendered shall be considered as ordinary business income subject to Sec. 24(A)

Share of A Partner in Taxable or Business Partnership If net income, it shall be treated as dividend and shall be subject to a final tax as follows: a. RC, NRC, RA 10% b. NRA-ETB 20% c. NRA-NETB 25% If net loss, it may be taken by the individual partner in his return of income. Payments made to a partner for services rendered shall be considered as compensation income subject to Sec. 24 (A)

Tax Avoidance Legal and not criminal penalty subject

Validity to Illegal and subject to criminal penalty

Managerial/ Supervisory Rank and File Employees Employees Compensation/ Salaries/ Wages Subject to Income Tax Subject to Income Tax Page 2 of 6

Fringe Benefits Subject to fringe benefit tax Forms part of compensation (FBT) therefore subject to income tax; Subject to exceptions De Minimis Benefits Income but not compensation, Income but not compensation hence not taxable hence not taxable Exclusions Refer to flow of wealth not treated as part of gross income because exempted by the Constitution, statute, or do not come within the definition of income. Generally a receipt which is excluded from taxable income. Deduction Refer to the amounts which the law allows to be subtracted from gross income in order to arrive at net income. Personal Exemptio Are arbitrary amounts allowed by law to an individual taxpayer, theoretically to provide for personal and living expenses.

Something earned or received by the taxpayer which do not form part of gross income. Allowed for all kinds of taxpayers, whether natural or juridical. May be availed of by a NRA-ETB whether or not there is reciprocity.

Is not a receipt but is generally an expenditure which is permitted to be subtracted from income to determine the amount subject to tax. Something spent or paid in earning gross income

It is an immunity or privilege, a freedom of charge or burden to which other are subjected.

Constituted as a full and final Intended to equal or at least payment of the income due approximate the tax due from from the payee on the said the payee on the said income. income. Who is primarily liable Liability rests primarily on the Liability rests upon the withholding agent taxpayer Need to File a Return Payee is not required to file an Income recipient is still income tax return for the required to file an income tax particular income return and/or pay the difference between the tax withheld and the tax due on the income. Coverage a. All income subject to final Those income payments taxes (e.g. passive gross covered by the expanded income of NRA-NETB) withholding tax. b. Fringe benefit c. Informers reward to Examples: Persons instrumental in Professional fees, talent fees, the discovery of violations Fees paid to medical of the NIRC and the practitioners discovery and seizure of Income payments to partners smuggles goods of GPP VALUE ADDED TAX (VAT)

Generally allowed for all kinds of taxpayer, whether natural or juridical. May be availed of by NRA-ETB whether or not there is reciprocity. May be subtracted ONLY from income derived from trade, business or exercise of profession.

Theoretical provision of law for the personal and living expenses of the individual. Allowed ONLY to individuals.

May be availed of by NRA-ETB only upon the basis of reciprocity. May be subtracted from both: a. Compensation income; or b. Income derived from trade, business or exercise of profession

Sale on Installment Plan Initial payment do not exceed 25% of the gross selling price Seller shall be subject to output VAT on the instalment payments received, including the interests and penalties for late payment actually and/or constructively received. The buyer of the property can claim the input tax in the same period as the seller recognized the output tax. Payments that are subsequent to initial payments shall be subject to output VAT.

Sale on a Deferred Plan Initial payments exceed 25% of the gross selling price Transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale.

Output tax shall be recognized by the seller and input tax shall accrue to the buyer at the time of the execution of the instrument of sale. Payments that are subsequent to initial payment shall no longer be subject to output VAT. Effectively Zero-rated Effectively zero-rated sales shall refer to the local sale of goods, properties and supply of services by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreements i.e. Sale of Vat-registered person to ADB or IRRI An application for zero-rating must be filed in and approved by the BIR before the Page 3 of 6

Tax credit Reduces the Philippine Income tax liability It is subtracted from the tax (net) amount to be paid. Final Withholding Tax System

Deduction Reduces taxable income upon which tax liability is calculated from Subtracted from gross income before tax is computed.

Automatically Zero-rated A zero-rated sale generally refers to the export of sale of goods, properties and supply of services by a VAT-registered person.

Creditable Withholding Tax System Amount of Tax Collected

No need to file an application form and to secure BIR approval before the sale. The

sale is automatically.

transaction may be considered effectively zero-rated. Without an approved application for effective zero-rating, the transaction otherwise entitles to zero-rating shall be considered EXEMPT. Sales to registered ecozones Sales to foreign embassies and and Freeport zones enterprises its personnels are effectively are automatically zero-rated. zero-rated provided that: 1. The sale has been made to the embassies in their official capacities; and 2. Zero-rating allowed on the basis of reciprocity duly proved thru authentic documents. Considered a taxable transaction for VAT purposes, but shall not result in any output tax The seller can claim a refund or a tax credit certificate for the VAT previously charged by suppliers The word ZERO-RATED must be prominently imprinted or stamped on the face of the VAT invoice or receipt to be issued by the seller. Otherwise, the transaction becomes subject to the regular VAT rate. This requirement prevents the buyer from claiming input tax credits arising from such taxable sale. Zero-rated Sales The transaction is completely free of VAT because the tax rate applied on the tax base is zero, hence, the seller charges no output tax. VAT payer can claim and enjoy a credit or refund for the input tax. The benefit is 100% of the tax. (total relief) Still considered as taxable sales for the purpose of measuring turnover sales VAT registration is required. Vat-exempt Sales Exemption only as it removes the VAT at the exempt stage.

zero-rated

VAT taxpayer. TRANSFER TAXES Estate Tax Tax on privilege to transfer property upon ones death. Taxpayers: Individuals only Generally imposed on Donations Mortis Causa Tax Rate are relatively higher (5-20%) Extension for payments is allowed Exemption from net estate per table is P200,000 Estate Tax Donors Tax Tax on privilege to transfer property during ones lifetime. Taxpayers: Individuals and Corporations Generally imposed on Donations Inter Vivos Tax Rate lower (2-15%) Extension for payments is not allowed Exemption from net gift per table is P100,000

Inheritance Tax Basis Tax on the privilege to transfer Tax on the privilege to receive property upon ones death. property from the deceased. Who pays the tax Paid by the estate represented Paid by the recipients of the by the administrator or properties of the estate. executor. NIRC REMEDIES Table Of Prescriptive Periods Normal or Ordinary Abnormal or Collection Without Assessment Extraordinary Assessment Assessment Prescriptive Period of Assessment 3 years from the 10 years from No prescriptive last day prescribed discovery of non- period for by law for the filing filing of return or assessment when of the return, or if filing of false or the government filed beyond fraudulent return opts to collect prescribed by law without assessment from the day the return was filed. Prescriptive Period For Collection 3 years from 5 years from the 10 years from issuance of date of final discovery of nonassessment, unless assessment filing or fraudulent there is fraud in or false return which case 5 years; or a period agreed upon between the CIR and the taxpayer (which may be less than 5 years), in case of an extended assessment agreed upon under Sec. 222 (b)

VAT payer cannot claim a credit or refund for the input tax (which could result to increased prices of goods or services) (partial relief) Not considered as taxable sales; A person who makes only exempt sales is not a taxable person for VAT purposes and may not register for VAT VAT registration is optional.

Exempt Transactions Involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status Vat-exempt or nor of the party to the transaction. Transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

Exempt Party A person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-

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Protest Period to File Taxpayer is given 15 days from Taxpayer is given 30 days from receipt of the PAN to make his the date of the receipt of the written reply thereto. FAN to file his protest. Sufficiency Due to the shorter period of Usually sufficient and time given to make a reply, the comprehensive to explain the taxpayer generally does not legal and factual bases why the respond in an adequate assessment is incorrect, and manner to the specific findings certain documentary evidence of the revenue officer not presented during the preliminary assessment phase and legal authorities and jurisprudence relevant to the findings of the revenue officers are submitted or presented. Effect of Failure to File Failure to reply to PAN on time Failure to file a timely protest makes the taxpayer in default to FAN makes the formal and authorizes the revenue assessment final and executor, official to issue the FAN. and the taxpayer loses his right However, no liability for to contest the assessment, at additional or deficiency tax the administrative and judicial arises from such failure. levels, even if such assessment is weak or has no legal basis. Directory vs Mandatory Filing of the reply is directory Due to the consequences, it on the part of the taxpayer. can be said that the filing of a protest against an assessment is mandatory and had to be made on a timely manner. Deficiency Tax Collection Delinquent tax can be Deficiency tax can be collected immediately collected also through administrative administratively through the and/or judicial remedies but issuance of a warrant of has to go through the process distraint and levy, and/or of filing the protest by the judicial action. taxpayers against the assessment and the denial of such protest by the BIR. Civil Action The filing of the civil action for The filing of a civil action at the the collection of the delinquent ordinary court for the tax in the ordinary court is a collection of a deficiency tax proper remedy. during the pendency of protest may be the subject of a motion to dismiss. In addition to a motion to dismiss, the taxpayer must file a petition for review with the CTA to toll the running of the prescriptive period. Penalties A delinquent tax is subject to A deficiency tax is generally not administrative penalties such subject to the 25% surcharge, as 25% surcharge, interest, and although subject to interest compromise penalty. and compromise penalty. Delinquency Tax

Reply

Distraint Levy As to the properties covered Personal Property Real Property How Effected Distraint is effected by the Levy shall be effected by seizure of the goods, chattels writing upon the duly or effects. authenticated certificate the description of the property upon which the levy is made and AT THE SAME TIME, written notice of the levy shall be mailed to or served upon the Register of Deeds and upon the tax payer. Notice of The Sale The notice of the sale shall be Within 20 days after the levy, exhibited in not less than 2 the real property will be public places in the advertised for sale for a period municipality or city where the of at least 30 days. The distraint was made. (One place advertisement shall be effected of posting is the Office of the by posting a notice at the main Mayor.) entrance of the municipal building or city hall and in a public and conspicuous place in the barrio or district in which the real estate lies AND publication once every week for 3 consecutive weeks in a newspaper of general circulation. Acquisition by the Government Purchase by the Commissioner The Internal Revenue Officer or his deputy in behalf of the conducting the sales shall National Government under declare the property forfeited Section 212 of the NIRC. in favour of the government under Section 215 of the NIRC. Right of Redemption The taxpayer is not given the The right of redemption is right of redemption with granted in case of real property respect to distrained personal levied upon and sold, or property. forfeited to the government. Right of Pre-emption With right of pre-emption With right of pre-emption Abatement Nature Involves a reduction of the Involves the cancellation of the taxpayers liability entire tax liability of a taxpayer Officer/s authorized to compromise/abate CIR and Regional Evaluation CIR Board Grounds 1. Reasonable doubt as 1. The tax or any to validity of portion thereof assessment; or appears to be 2. Financial incapacity unjustly or of taxpayer excessively assessed; or 2. The administration and collection costs involved do not justify the collection Page 5 of 6 Compromise

of the amount due. Reconsideration Involves re-evaluation of assessment based on existing records. It does not toll the Statute of Limitations Reinvestigation Involves presentation of newly discovered or additional evidence. It tolls the Statute of Limitations

Tax Refund The taxpayer asks for restitution of the money paid as tax. Two-year period to file claim with the CIR starts after the payment of the tax or penalty

Tax Credit The taxpayers asks that the money so paid be applied to his existing tax liability. Two-year period starts from the date such credit was allowed (in case credit is wrongfully made).

Local Taxation Real Property Taxation LGUS authorized to levy the taxes Provinces, Cities, Municipalities Provinces, Citites and and Barangays Municipalities in Metro Manila Power or Authority to Grant Tax Exemptios Expressly provided (Sec. 192, No power to grant tax LGC) exemptions. Exemptions from RPT granted under Sec. 234, LGC granted by CONGRESS Date of Accrual st Unless otherwise provided in On the 1 day of January the LGC, all local taxes, fees or st charges shall accrue on the 1 day of January of each year; however, new taxes, fees or charges or changes in the rates st thereof, shall accrue on the 1 day of the quarter next following the effectivity of the ordinance imposing such new levies or rates (Sec. 166, LGC) Manner of Payment Maybe paid in quarterly Four equal instalments instalments Time of Payment st st Within first 20 days of January 1 on or before the 31 of or of each subsequent quarter March nd th as the case maybe 2 on or before 30 of June rd th 3 on or before 30 of September th st 4 on or before 31 of December Exception: special levy Prescriptive Period of Assessment Within 3 years from the date No express provision on they become due prescriptive period of assessment Prescriptive Period of Collection Within 5 years from the date of Within 5 years from the date assessment by administrative they become due; within 10 or judicial action; within 10 years from the discovery of

years from the discovery of fraud or intent to evade fraud or intent to evade payment payment Remedies Governments Remedies: Governments Remedies: 1. Governments lien 1. Governments lien 2. Civil Remedies; 2. Civil Remedies: a. Administrative action a. Administrative action i. Distraint levy of real property ii. Levy b. Judicial action for tax b. Judicial action for tax collection collection Taxpayers Remedies: Taxpayers Remedies: 1. Questioning the 1. Questioning the Constitutionality of the Constitutionality of the Local Tax Ordinance ordinance before the before the Secretary of Secretary of Justice Justice 2. Protest against the 2. Protest against the assessment assessment with 3. Claims for refund or tax a. LBAA then to credit b. CBAA Note: payment under protest 3. Claims for refund or tax is not necessary) credit Note: payment under protest is generally necessary) LOCAL TAXATION Local Government Taxation Imposition of license, taxes, fees and other impositions, including community tax as a means to create its own sources of revenue. Real Property Taxation System of levy on real property imposed on a country-wide basis but authorizing, to a limited extent and within certain parameters, local governments to vary the rates of taxation. Income Tax Income tax is a tax on all yearly profits arising from property, professions, trades or offices, or as tax on a persons income, emoluments, profits and the like. th Due on or before the 15 day th of the 4 month following the close of the taxpayers taxable year. Due when the taxpayer has earned income as a result of the conduct of its business.

Business Tax Business taxes imposed in the exercise of police power for regulatory purposes are paid for the privilege of carrying on a business in the year the tax was paid. Paid at the beginning of the year as a fee to allow the business to operate for the rest of the year. Prerequisites to the conduct of the business.

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