TAXATION ONE
Fundamentals of Taxation ◙ “benefit receive theory”
government and people are mutually mandated by law to protect and support one another. both a power and a process
◙ as a power:
inherent
delegated ◙ Inherent
no need for a written law
born together with the birth of the state
only congress can exercise the inherent power of taxation ◙ National (Congress)
When the congress enacts a tax law, there is no need for consultation and there is no violation of the due process clause because in a representative democracy the signature of the congressmen signifies the consent of the constituents.
All revenue bills must emanate from the lower house. Delegated Power of Taxation
exercised by the: president province municipality city barangay
They can only exercise the power of taxation trough a legislation enacted by congress.
When the LGU enacts taxation laws through their Sanggunians, there is a need for consultation. Relationship of the government and the people in terms of taxation
mutual support
it is the responsibility of the State to protect and provide basic services to the people; in as much as it is the duty of the people to support its government
Executive Structure
Executive Department
Secretary of Finance
BIR BoC
Extent of Taxation (SPUC) S – supreme P – plenary U - unlimited C - comprehensive SCOPE (BRATIPPP) B – business R – rights A - acts T - transactions I - interests P – privileges P - persons P – properties
REVENUE TAX
amount collected amount imposed All funds or income
derived by the gov’t whether from tax or any other source (charge, fees, tolls, aids)
one source of gov’t ( money or income)
Effects of taxation on individuals
income effect
substitution effect (taxes & economic efficiency)
Police Power Tax Power
local national
License (regulatory tax) taxes Benefits (PRIC) P – protection R – resources I – incentives C – conducive climate Collection ◙ nature : mandatory
◙ legal basis : benefits-received theory
“The power to tax includes the power to destroy.” Underlying Principles of Taxation
it proceeds from the theory that the existence of a government is a necessity territoriality (w/ exception)
benefits – received principle
Nature and characteristics of the state’s power to tax:
inherent in sovereignty
legislative in character
subject to constitutional and inherent limitation
The power to tax is absolute as long as it is within the confine of constitutional limitations. Purpose of Tax
used only for the support of the government, to deliver basic services to the people, to provide for public needs Most Favored Nation Clause
invoke and pray for lower rate by demanding the same preferential rate given to the country which is considered to be the most preferential
A state is not allowed to tax another state because of their equality as both sovereigns. International Comity
expands
Doctrine of Tax Exemption by Implication not allowed!
PRINCIPLES OF TAXATION 1. Territoriality BRATIP3
◙ Income Taxation – a tax imposed on the right to earn an income ( transfer taxes and donor’s tax) ◙ exception to territoriality:
☼ OFW’s
1997 and prior years →all income are taxable
1998 onwards → all income realized through / under e’er – e’ee relationship is exempt from taxation → margin fee – tax on conversion
→ GNP - OFW ◙ Diffusion of wealth
( from rich to poor > proportionate taxation ) ◙ Social stability
protect local industries SOCIAL TAXES (import-export tax)
(DUTY) 1. Dumping duties 2. Countervailing duties 3. Marketing duties 4. Discriminating duties Illustrations 1. Dumping Duties
added tax on imports with lower cost (due to cheaper costs of production abroad) Difference
+ DD
added to the price of the import ( so our local manufacturers can sell their products competitively)
2. Countervailing Duty
protection over agricultural products (marine / agriculture / aquatic) in order to offset foreign subsidies
pre and post lowest subsidies are available abroad 3. Marking Duty
punish misdeclaration 4. Discriminatory Duty
punish countries that discriminate Filipinos abroad by imposing discriminatory taxes over their goods coming into the Phil.
WTO /GATT → the Phil liberalized importation → they look at tax as the culprit for the free flow of goods > import – export taxes Principle of Sound Tax System
Fiscal adequacy – just enough for the governmental functions
Administrative Feasibility – clear, simple, brief and concise tax system
TAX LICENSE
Power of taxation Police power For the government to
generate revenue
For common good Generally limited No restriction Post-activity imposition Pre-activity
imposition DIRECT AND INDIRECT TAXES
Burden of Taxation – who has the obligation to pay 2 groups of taxes (as to burden of succession)
1. direct 2. indirect TRADITIONAL EXEMPTEES REC R - Religious E - Educational C - Charitable Institutions
REC they enjoy the exemption privilege by tradition which is already enshrined in our constitution the constitution provides that the REC are exempted from payment of taxes
but not all taxes because they are only exempt Conditions for REc to be Exempted:
1. ownership of the property 2. A – actual use → not idle land
D - direct use → religious entity (rel purpose) E – exclusive use → not leased to others
upon concurrence of all the conditions tax, tax exemption is AUTOMATIC!
when one of the 2nd requirements is not complied with, (ex. Religious entity used for educational purpose like SLU)
the entity must apply for tax exemption privilege and while waiting for the issue of the certificate of exemption, the entity must pay its taxes first which upon the issuance of the certificate can be claimed within two years.
when the entity does not actually use the entirety of the property. Rr the entity must pay the taxes proportionately!
Tax exemption – a privilege enjoyed by an individual which is not enjoyed by another, although they may have same circumstances
it is personal non-transferable
idle R
nobody is exempt from an indirect tax as a genera rule; privileges refers only to direct taxes TEP refers only to direct taxes]
APPROACHES / CRITERION of Determining the amount of tax to be paid by an individual: 1. BENEFIT APPROACH
The more benefit received by an individual, the more taxes should be paid. Problem: It is difficult to measure since benefit is relative
2. ABILITY TO PAY APPROACH
the more money, the more or greater is the amount of tax to be paid closest to the formula that “=” burden of taxation
In the Phils: we use both approaches so that the ability to pay principle refers not to the money but also to the privileges enjoyed by an individual as the measure of taxes to be paid by him.
POLICY GUIDELINES
1. The congress should avoid increasing tax on average taxpayer. They should instead activate the implementation of the law. Inform the people about taxation.
2. Tax those who are not yet taxed.
the underground economy, agents, sidewalk vendors, those engaged in buying and selling 3. Utilize the ability to pay principle.
4. Encourage business expansion by giving incentives. 5. Distribute wealth.
There is a move for a shift to a Gross Income Taxation in the BIR. Checks and Balances
used to monitor and prevent our congressmen in increasing the burden of taxation 1. lobbying
2. using the mass / broadcasting media 3. ballot
STAGES in making / enacting a Tax Law
1. Levy the making of a tax law (referring to national taxes) Gen rule : non- delegable
Exception : delegated only via a valid statute → to president / LGU
2. Assessment and Collection
usually delegated to the executive or to the banks 2. Payment of Tax
by the taxpayer
In delegating the power to levy a tax law, it is and should not always be cou[pled with “valid standards.” to clearly identify restrictions and limitations + (plus)
inherent limitations contractual limitations contributional limitations example :
The pres given the power to regulate the amount / rate of duties, tariffs and customs → he cannot increase the prevailing ratea by more that 50% at any given time.
LGU cannot tax all that are as included in the NIRC INDIRECT TAX
it is a tax for the end-consumer (EC) like the sales tax, Vat, excise tax, documentary stamp tax the burden of taxation is on the EC
the burden is passed on until it reaches the EC EX:
A taxable product comes into the country, whoever comes in contact with the product must advance the tax (paid the tax to the gov’t so that the gov’t can collect earlier because it is not certain when that product would be bought by the end consumer)
the gov’t in turn allows the person who advanced the tax to add it to the purchase price and pass it unitl it reaches the EC
Illustration: sales tax
Importer Manufacturer supplier whole seller retailer end consumer DIRECT / INDIRECT TAXES vis-à-vis TEP
A. Persons and Entity as subject matter a. Traditional Exemptees
◙ seller buyer
( advanced sales tax = an indirect tax) REC
buys paint
Q? Is it exempt from the payment of the sales tax which forms part of the purchase price? A! No! The traditional exemptees enjoying TEP are only exempt from direct taxes. Sales tax in an indirect tax. REC is liable to pay sales tax.
b. Entities enjoying “blanket TEP”
◙ Blanket TEP → is a privilege inclusive of the indirect taxes. It is only given in a very unique situation and only to an international organization or treaty where the Phils is a signatory thereto.
◙ entities given BTEP:
ADB / UNICEF / WHO
◙ seller buyer advanced 10% sales tax)
Buys paint (ADB)
Q? Is it exempt form the payment of the sales tax w/c forms part of the purchase price? A! Yes… ADB is enjoting “blanket” TEP inclusive of indirect taxes like sales tax.
Q? What happens to the 10% sales tax advance by seller w/c he is suppose to pass on to the buyer? A! The seller may refund the sales tax he advanced from the gov’t by tax refund or tax credit. ◙ Tax Refund – when you want to get the price that you have overpaid to the gov’t in cash. → apply for it ◙ Tax credit – when you show proof that you have overpaid and allow the gov’t to credit it on the next liability (overpayment) (diff. definitions including diff. taxes) → apply for it…
◙ ITOGON DOCTRINE
Overpayment, show proof of overpayment, (attach document) there can be automatic deduction now abandoned!!!
B. Activities
Export activities are tax exempt for business because it helps the country promote our product abroad. exempt from Vat w/c is an indirect tax.
exporter 70 % → abroad 30 % → locally
manufacturer sells to an exporter it is still an exportation activity need not do the actual exportation!
seller
did not know that the activity is tax exempt he bought raw materials & absorbed taxes he passed on the tax
he realized that the activity is tax exempt buyer
has the burden of taxation on the EC
the tax was passed on to him as part of the purchase price
◙ Q? Who between the buyer and the seller should apply for tax refund / credit? (the seller who paid the tax in advance or the buyer who has the burden of taxation) Accdg. to the rule, it is the seller who has the duty to apply for tax refund / credit.
Granting that the seller was able to refund, he holds the money in trust for the buyer who has the burden of taxation. He is a mere trustee of the buyer.
Other Classification of Taxation on the Basis of Measurement:
1. Specific – a measuring standard is used as a basis like number of gallons.. etc… 2. Ad Valorem – the basis is cost, purchase price or value (ex. Tax on motor vehicle) ☼ Pres aggressively used his power to tax on Tariff and Customs / Import and export: special levy on all products that come in – 6%
there is no way to hurt a businessman, they are partners for economic development ☼ Authority behind the Imposition
1. national – national gov’t, imposed on the entire country
2. local / municipal – LGU, community development tax, property tax ☼ Based on Rate
1. Flat rate – one rate involved (10 % VAT)
2. Graudated / Progressive Tax / Rate – lowest to highest > income tax (5 – 32 % ) VAT w/ one rate of 10% (original imposed)
◙Q? Is it a violation of the consti (as questioned by Sen AV Tolentino) Read the case :
Decision! No!... The SC said that the consti provides that the Congress must “evolve” a progressive scheme, come up with a design close to the ability to pay principle. The consti did not say that the congress must (“ ilapit kung maari ) (kapisanan ng mga mangagawa)
Progressive System of Taxation ☼ money taxes
P taxes!!
Degressive System of Taxation
some privileges are allowed to be deducted before the computation not proportion
used in the Phils – estate taxes Regressive System of Taxation
not used in the Phils money taxes
how? The raw materials are already taxed so that finished products are already free from taxes for the EC. Tax as compared to other terms in taxation!!
tax license
Post-activity Pre- activity Power of taxation Police power Bring income 2 d gov’t Regulation (mainly) Taxing authority Imposed by the LGU Expensive Relatively cheaper
BRATIPPP Only 4 common
permanence Revocable
concompliance More dangerous
As long as u r not caught Can’t operate w/o permit
toll Amount paid for the use of somebody else’s property.
tax toll
Demand of sovereignty Demand of proprietor
Can only be collected by the gov’t Cld only b collected by the gov’t or private individuals Based on gov’tal needs Based on the value of the property
◙Tax vs. Debt
tax – is not a debt
debt – the obligation or liability to pay money or render services to another
tax debt
Based on law Based on contract
Non-payment – punish by imprisonment Excpt: non-payment of CDT Exception 2 d exception: misdeclaration / alteration No imprisonment Excpt: BP 22 Non-assignable Assignable
Generally paid in money Money / cash or kind
Not subject to set-off Subject to set-off
except: Domingo Case
exception to the rule that taxes are not subject to set-off
when both claims of the taxpayer and the gov’t are both due, demandable and fully liquidated, it is covered by legal compensation / subject to set-off
due based on the voucher
tax debt
Under the Tax Code (prescription) Under the Civil Code (prescription) Cases When a Tax Becomes a Debt
BICC
1. when the liability is secured by a bond
2. when the tax becomes a delinquent tax to which the interest is imposed 3. when the obligation is enforced through a court collection
4. when the taxpayer and the government enters into a valid compromise agreement illustrations:
◙ bond given to secure a bond
when A owes the gov’t P150K (taxes) and he wanted to leave the country, he cannot do so w/o posting either: security, property, cash bonds before he be allowed to leave the country
if he comes back, he would settle the obligation w/ the gov’t
if he does not come back – the bond will be foreclosed. (bond covered by NCC) ◙ Interest Bearing
when the tax becomes delinquent, it automatically becomes interest bearing and when it becomes interest bearing, the collection will be covered by the Civil Code as it becomes civil liability and it will be done in court.
◙ compromise agreement ( valid in writing) Taxpayer : 150k tax liability
Main tax + interest may be subject to a compromise agreement
Surcharge not subject to a compromise / mandatory (phil banking case)
taxpayer proposed a compromise through a letter (formal letter) to the BIR. Tax liability may be reduced compromise (perfected and signed)
100K, paid in installment
becomes a contract becomes a civil liability
subsequently, taxpayer renege all paid would be forfeited in favor of the gov’t BICC throw away the tax code – apply all civil cpde provisions on the matter TAX vs SPECIAL ASSESSMENT
assessment / audit / investigation
BIR study your returns / investigation based on document submitted (scrutinize)
Process of checking if the taxpayer paid its correct amount of taxes to the gov’t (under-declared income / over-claimed deduction)
special assessment – basically not a tax
it becomes a tax (property tax)
unique (kind, manner, taxpayer)
improvement introduced to properties
Property owner
dirt road
LGU requested to act on the dirt road – 60% shouldered by the property owners once covered, once paid, payment should stop
only those directly benefited should pay
◙ Q? Are the REC exempt from special assessment?
NO! They are not exempt because of the Doctrine of Implication. It does not apply. ◙ Q? Are the REC exempt from EF?
YES! Because there is no basic tax to compute the SEF since they do not pay property tax. Special Levies on Properties (2)
☼ SEF (special education fund tax) ☼ Special assessment
LGC exempts REC from special assessments.
Real Property Owner (Local Tax) pays real property taxes
real properties defined in the NCC even fertilizers on the land Real Property Tax (Local Tax)
SEF is !% of the basic tax basic tax;
RPT basic tax
SEF (1% of the basic tax)
SEF Tax – to support the public high schools (delegated to LGU by the nat’l) A lawyer questioned the SEF:
SC said that the power behind the SEF is the police power. The purpose of the SEF to support high-schools is for general welfare of the people.
Customs Duties – are taxes levied by the gov’t on goods exported from or imported into the country.
tax duties
Broader bec all customs duties are taxes Not all taxes are customs duties Imposed on different subjects and objects Imposed on goods exported or imported Revenue - refers to the fruits of taxation
all funds or income received by the gov’t whether from tax or from any other source Tax – one of the sources of govt’s revenues
tax revenue
Amount imposed Amount collected Penalty – any sanction imposed as a punishment for violation of law
tax Penalty
Imposed to raise revenue Imposed to regulate the conduct thru punishment Imposed only by the gov’t Maybe imposed by the gov’t or private persons Arises from law Arises from law or contract
Subsidy – pecuniary aid directly granted by the govt to an individual or a private commercial enterprises beneficial to the public.
tax Subsidy
Maybe imposed on subsidy Not a tax
Margin Fee – collected by the govt via the Central Bank (CB) whenever there is a currency conversion (tax on conversion) an exemption from tax does not include an exemption from margin fees, unless the margin fee is incidental to the importation
◙ illustration: Special Incentives
importation of machineries to be used in a pioneer industry
incentive is given by the govt in the form of tax exemption on the importation when the importation is paid in foreign currency, then the conversion which is incidental to importation is also exempt from margin fee.
importation
Phil! currency conversion
paid in dollars…
= margin fee need not be paid!!! 3 Definitions of Tariff
1. The book of rates usually in alphabetical order containing the names of the several kinds of merchandise with the corresponding duties to be paid on the same.
2. As duties, payable on goods imported or exported.
3. As the system or principle of imposing duties on the importation or exportation of goods (system of computing) Tariffs and customs duties are used interchangeably in the tariffs and Customs Code!
☼ Reasons for the Distinctions! * there remedies are different
* limitations apply to only one and not the other
* exemption from taxes does not include exemption from license fees
* for purposes of municipal taxation, the validity of a tax or a license ordinance is determined by the nature of the imposition and authority of the municipal corporation code
3 Kinds of Licenses 1. for revenue purposes
2. for regulatory purposes
3. for both revenue and regulatory purposes
Doc of Tax Exemption by Implication v Doc of Tax Exemption by Incidence ◙ illustrations!
1. DTE Implication T exempt Tax A
Tax B Tax C
Exempt from one tax does not include exemption from the taxes! 2.DTE Incidence
Church (TE) Religious entity
(direct activity) Religious activity
Income during masses
exempt from income tax (priest)
the resulting exemption is a necessary part of the former exception.
◙ Income of a priest outside the premises of the church! taxable income? It depends!!
a. if hi surrenders such to the church, then it is exempt!!
b. If he uses it for his personal purposes, then it is taxable as part of his personal income. ◙ Allowances (transportation tec..)
taxable? It depends!
a. If you are ask to liquidate them, it is not taxable!
b. If you are not required to liquidate, then it forms part of your income, taxable on you! ◙ Payment of taxes: Is it compulsory?
yes! It is compulsory if you are covered by the imposition. ◙ How are taxes paid?
☼National taxes – accredited banks
(AAB) accredited agent bank
☼ Local Taxes – to the provincial, city, municipal, brgy. , treasurers! ◙ Importance of Taxes
Life Blood Theory
without money, the govt cannot pay its expenses and therefore, it ceases to exist. It has to require its citizens and residents to take the monetary burden and taxes in order that it can perform its functions and services.
TWO
SOURCES, NATURE and APPLICATIONS of TAX LAWS & REGULATIONS
Tax Law – any law which provides for the assessment and collection of taxes for the support of the govt and other public purposes.
SOURCES (10) 1. constitution
2. Statutes and PDs
PD 231 – Local Tax Code
PD 464 – Real Property Tax Code (RPTC) 3. EO’s and PBs
4. Prov/ City / Mun / Brgy Ordinances
( subject to limitations – constitutional, inherent& those provided in LTC and RPTC) 5. Revenue Regulations promulgated by the Dept of Finance (DoF)
☼
Requisites for a valid regulation
1. not contrary to law 2. published in the OG
3. useful, practical & necessary 4. reasonable
5. conforms to legal provisions 6. Administrative Issuances of the BIRor the BoC
Revenue Memo Circular
Customs Memo Orders 7. BIR Rulings
8. Judicial Decisions 9. Local Tax Ordinances
10. Tax Treaties and Conventions with foreign countries
☼
Illustrations…
Revenue Bills
LH UH OP Republication DoF
BIR BoC
The Sec of Finance formulates the Rules and Regulation Implementing guidelines which when published have the force and effect of law.
Revenue Regulations– with force and effect of law ◙ Requisites of Revenue Laws or Regulations:
1. not contrary to law or the consti or contradicts its contention. 2. published in the OG or 2 newspapers of gen circulation for its validity 3. reasonable in their provisions,
4. w/in the authority conferred by the legislative
5. conform with the legal provisions of the law it seeks to implement 6. useful, practical, and necessary for law enforcement
Revenue Regulations can’t be given retro active effect if it is prejudicial to the taxpayer. Exceptions:
1. When the TP deliberately omits facts in his returns or documents required of him by the BIR.
2. When the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based.
3. Taxpayer acted in bad faith. BIR RULINGS
answers to queries / interpretations of the commissioner - does not have the force and effect of law
- there are less general interpretation of tax laws at the admin level, issued by CIR receivable by Sec of Fin (SF) - purpose is to clarify certain provision of tax law
- merely advisory - maybe changed anytime
- “sort of information service to the taxpayer” - Personal to the inquirer
☼ illustration
T in doubt if covered BIR (study the new law sent a letter of query to & the T’s circum answer stances)
tax payer BIR ruling
If the ruling contained a wrong conformation, the inquirer (T) who relied on it cannot invoke the “doctrine of estoppel” against the govt when the latter would enforce payment against him
the govt is not affected or bound by the mistakes of its subordinate officials + the lifeblood theory good faith has n premium in taxation
estoppel not applicable
Three years after payment of the tax due, and there was no payment made on such three consecutive years, it is presumed that all taxes have already been paid!!
Police power of the BIR
collection of taxes is never unreasonable BIR can seize the properties of the taxpayer
The decision of the Commissioner is applicable to the SC and not of the Dep Commissioner / Collector. Decision of the Collector is appealable to the Commissioner
TREATIES GATT Analysis:
created by the Great 8, eliminating taxation as an hindrance to the free flow of goods between and among the countries.
most 3rd world nations signed, including the Phils.
upon the return of the documents to the proponents (g*), they did not sign Result
G8 product scan enter our country without taxes (tariffs)
our products cannot enter their country because of high tariff rates PROSPECTIVITY OF TAX LAWS
prospective in character and application 1/1
One tax period 12/31
If:
June 30 is the start of the imposition; the same cannot cover any activity prior to that date. Exception:
1. Income tax even if you only work for one day or for broken intervals, the tax period retroacts from day 1, Jan. 1!
2. when the retroactivity is the clear intention of the legislature 3. Retroactivity is necessarily implied in the language used
Importance of knowing whether a tax is national or local:
- to be able to apply the correct admin. Rules for the enforcement and collection of said tax
- to be able to determine the correct prescriptive periods for the assessment and collection of the same IR Laws are not political in nature, they are civil (laws) in character…
not suspended during foreign occupation
remain effective during war However…
when we refer to the relationship between the state and people, we can say that our laws are political in nature because it affects not only the life of the state but the most fundamental relationship between the state and its people. Tax Laws are not penal laws..
they are civil in nature, although penalties are provided for their violation because they do not define crimes and provide for their punishments.
Important Tax Officials 1. Secretary of Finance 2. CIR
3. Presiding Judge and Associate Judges of CTA 4. Prov’l, City, & Mun’l Treasurer
5. Deputy Commissioner of the BIR Collectors and Revenue District Officer of the BIR 6. Examiners and Collection Agents of BIR
POWERS AND DUTIES OF THE BIR BIR – created by Ca 466
- effectivity date, July 1, 1939
- effective agency for the collection of taxes
- incharge in the primary function of administering the internal revenue laws and regulations, collection of IR taxes - under the control of Dept. of Finance
GENERAL POWERS
1. Assessment and collection of all NIR taxes, fees and charges!
Upon the submission of the taxpayer of his return, he will be given a payment order by the BIR, then he will pay to the AAB, then he goes back to the BIR to show proof of payment without going over your returns
The BIR has three years to sit down and study the returns; whether or not you have given a correct return and paid the proper taxes : the process is called assessment.
Assessment notice is the document that fixes the tax liability of a taxpayer
it requires the taxpayer to settle the amount within so much time
it is also a demand letter ]
send to the given address in the return (not P.O. box)
A taxpayer must give his proper / correct address in his return or inform the BIR of any change thereof. Non-receipt of the assessment notice will not in any way affect the govt to collect
No violation of due process clause because of the constitution
CIR assessments are presumed to be correct and the burden rests upon the taxpayer to overcome this presumption and to show proof to the satisfaction of the Tax Court that the assessment is not correct.
2. Enforcement of all forfeitures, penalties and fines. ◙Execution of judgment by the CTA
◙Administer supervisory and police power given by TCode
☼ illustration
A taxpayer liability as fixed in the assessment is 200K…
after 30 days, if he does not settle it becomes final and ripe for collection
if he cannot pay, the BIR has the power to get his properties more or less equivalent to his liabilities and place it in a warehouse. After so much time is given to the taxpayer, if he still could not pay, the properties will be sold in public auction, the proceeds are applied to his liabilities.
If it’s not enough, they could come back and get other properties.
Under the Civil Code, there are properties that are exempt from attachment; the same rule does not apply in taxation.
4. Giving effect to and administering the supervisory and police power conferred by the NIRC or other laws. ◙ Supervisory Power
☼ illustration:
A. A an owner of XYZ Dept store that is very profitable submitted an unbelievable return; the BIR can send one of its officers to sit down beside the cashier and for 3 consecutive days comes up with an assessment of the average daily income of the dept store.
B. Surveillance
XYZ lumber with high and close gates, the BIR officer can wait outside the gate and count the number of delivery trucks coming in and out of the gate, and can come up with an estimate average income by judging on the capacity of every delivery truck.
4. Assignment of IR officers and other employees to other duties.
Especially those in the excise division which is a very healthy ground for graft and corruption, officers in the excise division are transferred after two years.
5. Provision and distribution to proper officials – forms, receipts, certificates, stamps and appliance. 6. Issuance of receipts.
7. Submits
(1) annual report
(2) pertinent info to Congress
(3) report to the Congressional oversight committee CHIEF OFFICIALS OF THE BIR
Commissioner of Internal Revenue (CIR)
4 assistant chiefs ( Deputy Commissioners ) POWERS OF THE COMMISSIONER OF IR
1. Original and Exclusive power to interpret the provisions of the NIRC and other tax laws. Administrative Level
tax problem is still in the administrative level, once brought to the court, such has the jurisdiction to interpret tax law.
always according to the intention of congress subject to review by SF
Q? Is it not in conflict with the provision of the constitution on separation of powers as statutory interpretation as the role of the court.
NO! The power to interpret by the CIR is exercised on the administrative level.
take note that there is no judicial remedy for the taxpayer if there is no exhaustion of administrative remedies.
2. Decide cases relative to DROP. D – disputed assessments
R – refund IR taxes
O- other matters (NIRC, POL, OL, SL) P – penalties imposed without authority
Doctrine of Ejusdem Generis - to the other things / matters relative to those previously stated ☼ disputed assessments
◙ illustration:
CIR and T = sit down for pre-assessment (discuss) CIR send the assessment notice
assessment notice without pre-assessment is void
disputed assessments – questioning the validity of the claims of the govt against the taxpayer
pre-assessment – no agreement
formal assessment – notice to the taxpayer for payment within 30 days ☼refund / tax credit
O – overpayment I – illegal payment E – erroneous payment
P – penalty imposed without authority ◙ illustration:
overpayment
paying more than what you ough to pay illegal payment
payment made due to harassments
payment made to non-agents, those who are not authorized to collect payment erroneous payment
payment made in the wrong return - income tax return
- donor’s tax return - VAT return
payment for income tax made in a VAT return, the mistake can be notified by paying again, this time the right return and refund the wrong payment.
other matters arising under the NIRC or other laws or position thereof administered by the BIR
subject to the exclusive appellate jurisdiction of the CTA
not included but related like the implementation of special laws (ie… energy tax) penalties imposed without authprity
compromise penalty included in the computation when in fact no compromise was entered into by the govt and the taxpayer.
decisions revocable by : SF
appeal CTA CA SC
3. To obtain information and to summon, examine, and take testimony of persons to effect tax collections. Doctrine of Fruit of the Poisonous Tree does not apply in taxation.
“Third Party Rule”
The collector can go a third party to obtain information regarding the activities of the taxpayer. Purposes of such power: (RA 8424)
a. to ascertain correctness of any return b. to make a return when none has been made
c. to determine the liability of any person for any internal revenue tax d. to collect from any person liable for any IR tax
e. to evaluate tax compliance ◙ illustration:
X – smuggler N- neighbor (rich) (envious)
Acts upon the tip BIR 1. inquire from:
LTO now many cars registered RD how many properties
DFA how many times he left the country.. etc..
The BIR now may disregard x’s return if it is unbelievable and prepare one for X or…. If X submitted no return, the CIR will make one for him!
In the process of preparing a return for a taxpayer, the CIR must observe the “best evidence obtainable rule” BEOR
BEOR – in making / preparing a return for a taxpayer, all entries must be supported by hard facts and not be based on hearsays, it must be supported by data correctly gathered.
absolute certainty of source of unreported income is not necessary. SMC vs Lucio Tan
before excise tax is based on the factory price of the goods. now RA 8424
excise tax is based on the average price at which the 20 big buyers of the manufacturer who buy the goods, ◙ illustration of the case
SMC Lucio Tan (AB)
Beer - FPI P8 Beer - FPI P3
SMC obviously pays greater excise tax than AB. Unlike in SMC however, end consumer, retailers and suppliers cannot go to AB to buy; according to AB – it only manufactures beer, it has no marketing permit.
all beers of AB are delivered to Tan’s marketing arm.
SC decision on the issue that Tan is liable for 5.5 tax evasion: No tax evasion, tax avoidance!! (Based on the Yutibo case)
4. To make assessment and prescribe additional regulations for tax administration and enforcement.
BEOR commissioner is granted the power to make a return or income tax return. 5. To change the tax period
Income Tax : April 15th (prescriptive period) Govt: March 15th
Private: April 15th
prior to the 15th, no officer can force any income earner to pay after that date, payment / collection is demandable
to pay
when can the change be made & demand payment immediately?
when may the CIR exercise the power of constructive restraint in enforcing tax collection? CLO
C – concealment f property for purposes of tax evasion L – Taxpayer is leaving the country
O – Taxpayer is unnecessarily obstructing the collection of taxes R – retiring from business
R – Taxpayer is removing property from their location ☼ obstruction
Petition for injunction to stop the BIR from tax collection is never allowed to the regular court Court of Tax Appeals
☼ removal
The BIR may go to the house of the taxpayer and make an inventory of the properties located therein. Thereafter the taxpayer cannot remove such properties
pending settlement of taxpayer’s liability, the BIR may make an inventory of all T’s property; the implication of the inventory is that T cannot remove his property from the given location
6. To compromise tax liabilities of taxpayer.
to compromise for inability 10% of the assessed
when the TP enters into a compromise and later on reneged the TP must pay the original tax assessed 40% of the assessed tax for other reasons
◙ to whom may the power of compromise be delegable:
500 delegable
Commissioner of Internal Revenue and the four Deputy Commissioners subject to the Evaluation Board
◙ compromise proposal b the government
excessive, unjust, unreasonable or confiscatory
patent belief that the TP is really financially incapable of paying the tax ◙ CIR may accept compromise agreement
does not involve fraud
it is still in the administrative level
CIR cannot accept compromise proposal (civil aspect) when there is fraud
when there is already a final decision CIR can accept the proposal (criminal aspect)
there must be a fiscal’s consent no information filed
there is no fraud
7. To conduct inventory / surveillance of business
any / every business either sole proprietary partnership or corporation
there must be an inventory of goods that the business / entity was not able to dispose mandatory penalty is substantial P 50K
8. To prescribe presumptive gross / sales receipts.
business – computation of business tax is based on receipts
there are business however that do not issue receipt by practice, customs & tradition like taxi and jeepney operators how then will their business tax be computed?
PGR
1. the BIR officer would ask the driver for the registration papers of the car, rate the operator, franchise.. etc..
2. officer will go to LTO and inquire
3. officer will ask the driver how many times he operates in a week
4. based on the inquiries the BIR officer will fix the presumptive gross receipts of the jeepney driver / operator
PGR – conclusively made in good faith and correct 9. To prescribe Real Estate Values
(Zonal Evaluation) Capital Asset
are those not income generating property Capital Gains Tax
6% zonal value (FMV by CIR) + 1.5% (FMV LGU)
7.5% consideration
whichever is the highest!
Burden of taxation cannot be transferred by mere agreement TP is determined by law. Appreciating value / price is not subject to IR Tax but covered by other taxes. (ie.. Local Govt) When a capital asset is sold, it is not subject to an income tax when the CGT has already been paid. Ordinary Asset
business income generating property it is subject to donor’s tax & income tax
◙ illustrations:
1985 2003
Q? If the lot is sold 2003, is there an income?
Yes! Everything that makes a person richer is considered income regardless of the source (even illegal).
2M 50k
Q? Is that income taxable?
a. If the lot is vacant, not used in business and therefore not helping the owner generate income, then the tax to be paid is a capital gains tax (CGT) and not income tax.
once CGT is paid, forget about income tax no need to report income anymore CGT and IT are incompatible it is always one without the other.
b. If the lot is used in business and is generating income for the owner, then pay income tax. Idle lot (white elephant) = capital asset
Useful lot = ordinary asset Q? How to compute CGT:
BIR Rule CGT is 6% of the: ● Zonal – FMV determined by CIR ● Assessed – FMV determined by LG
● Consideration – price agreed upon by the parties whichever is higher Real estate value is updated once every three years!
◘ Q? How to determine zonal value?
CIR calls a meeting of some subdivision developers, real property developers, appraisers, brokers and property owners to assess the value of the land.
◘ Q? How such computation is adopted?
To eliminate the inviting practice of parties of putting a very low purchase / consideration to be the basis of computing taxes.
◙ CGT is the sellers liability!
If there is an assessment by the parties to the effect that the buyer will pay the prescribed CGT and the latter did not pay, BIR will run after the seller!
Why? Burden of taxation cannot be passed on between the parties; it could only be shifted by provision of law.
10. To inquire into bank deposits in certain cases. when?
1. involves estate tax 2. subject of court litigation 3. TP signs a waiver
4. T and CIR entered into a compromise agreement and the reason of such is the T’s offer due to his financial inability to settle his tax liability. (10%)
Q? Is it not a violation of RA 1405 (Bank Secrecy Law) NO! The inquiry is indirect.
◘ illustration:
● T is liable for 200K (tax liability)
BIR comes to know that T has bank accounts:
BIR goes to the bank and ask if the deposit of T is enough to pay his liability amounting to 200K:
If it is not enough, the BIR officer will order the bank to freeze the account and goes back to the BIR to get “warrant of garnishment.”
The same is true if the bank deposit is enough / more than enough to satisfy T’s obligation to the govt.
Taxes exempt from BSL: estate tax
why?
it is the last tax to be collected by the govt ◘ A+ leaving a bank account
heirs, executors, administrators must pay the estate tax return within 6 months
there will be no transfer from the deceased to his heirs of this property if the tax is not paid to the BIR.
11. To prescribe additional procedural / documentary requirements.
A B
In connection with the submission a preparation of financial statements accompanying the tax returns. Hizon Case (2000)
● Hizon – a businessman from pampanga
liable for taxes after BIR investigation
BIR sent assessment notice (AN)
But BIR failed to enforce collection of taxes for so many years
New Director studied the records and ordered the reassessment of Hizon Hizon’s liability increased due to surcharges and compounded interest
BIR sent another AN to Hizon
Hizon ignored the same
BIR filed a judicial case for collection
Surprisingly, the document, papers for collection was not signed by the CIR.
Hizon’s lawyer contended that the document was not signed by the real party in interest, the govt represented by the CIR.
● SC Held:
It is true that under the rule (NIRC), whenever there is a judicial claim, the papers, documents must be signed by the CIR, and that it is also true that the power / authority to sign such papers are not included in the list of powers that can be delegated, nevertheless the list of those power which cannot be delegated does not also include the power to sign, hence it can be delegated.
12. Approve / reject the Refund of IR taxes.
13. To examine tax return and verify the tax due thereon. 14. To abate / cancel tax liabilities in certain case.
◘ Instances:
1. When the assessed tax is found to be unjust, confiscatory, excessive or oppressive! 2. The act of collection is more than the tax to be collected!
15. To examine tax return and determine tax due thereon.
16. To cause revenue officers and employees to make a canvass from time to time of any revenue district or region concerning taxpayers.
POWERS THAT CAN’T BE DELEGABLE:
1. Promulgations of rules & regulations to the SoF.
2. Issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau. 3. To accept a compromise proposal when the assessed tax is 500K-1M.
4. To abate any tax liability.
5. Ta assign and reassign IR officers to establish where articles subject to excise tax are produced or kept. Under the old rule, any tax official can issue a letter of authority, even the sub-ordinate officials.
New Rule only the Revenue Director can issue LOA (assessment notice) supposedly it is the CIR but such power is delegable.
IR Taxes should be settled asap in the administrative level.
interest runs even during the period of extension
court / judicial level
In the enforcement of tax, the govt is presumed to be doing the right thing!!! ◘ illustration
MV owned by A who is in engaged in the freight services, “T” hires the MV and loaded highly dutiable goods. EEIB intercept and impound the MV.
remedy for A initially he would seek the release from the CIR (exhaustion of administrative remedies) then to the CTA, never to the regular courts.
Investigation and seizure even without warrant is valid because it is always reasonable!!! ● Powers of BIR v. Customs
BIR – residence, warehouse, offices and business establishments
BC – cannot enter residences, dwellings case
BC entered the warehouse, owner questions their contending that they don’t have such power to enter residences.
SC held that the dwellings are not those that are contemplated by law, the residents are not immediate members of the owner’s family. The dwellings placed in the vicinity of the warehouse are intended to circumvent the law. How are tax laws interpreted?
● 2 factors to consider:
1. intention of the congress in harmony 2. constitution
Power to Interpret:
a. administrative CIR (given great weight) b. judicial court
Principle of Pari- Materia
different statutes referring to the same object should be construed with reference to each other study other laws or past laws
In case of doubt:
validity of tax laws favor of the entity exercising power of taxation govt / public tax exemption
additional tax burden – tax payer Inprescriptibility of Taxes
1. no return – imprescriptible
ie.. travel tax, doc stamp tax 2. with return – 98% of IR taxes
Bureau has threee years to study the return
after 3 years and the bureau failed to review your return and communicate irregularities, then the liability prescribes.
Doctrine that taxes are not subject to set-off ● Equitable Recoupment
in relation to tax refuind / credit OEIP claimed within 2 years
if not claimed within 2 years, payment can still be received if there are documents to prove overpayment because the govt cannot unjustly enrich itself at the expense of the taxpayer
not applicable in the Phils.
Doctrines not applicable to the government 1. estoppel
2. non-claim 3. laches ◘ illustration
Taxpayer asked for several postponements to delay collection until the bureau’s right to collect prescribes. “T” is still liable to pay!!
CONSTITUTIONAL PROVISIONS Due Process Clause
No person shall be deprived of life, liberty and property without due process. money is property
Assessment notice presumed to be correct, it fixes “T” liability. Is it violating due process?
NO!! “T” is given 30 days to question the AN. Equal Protection Clause
equality privileges enjoyed uniformity burden of taxation Class Legislation (void)
a law that discriminates against some and favors some.. Classification Statute (valid)
one that specifies the person or property to tax and those that are not. It is an exemption statute, the general construction of tax statute in favor of the tax will apply.
Non-imprisonment for non-payment of poll tax exception:
B falsification of the data / information in the poll tax ● poll tax – personal tax (CDT)
Non- impairment Clause in relation to taxation ◘ illustration:
G
() () G’tal Pro’tary
fxn fxn
Any contract entered into by the govt in its governmental function / capacity can be changed any time without the other party’s consent
ei : franchise (even if denominated as contract)
If the government entered into said contract in its proprietary capacity, then any change regarding the contract must be with the consent of the other party. (tax holiday)
Religious institution directly engaged in religious activities tax exempt. Note: It is the church that is exempt and not the person (priest).
speeches not sermons – income taxable! ◘ case
If the religious entity undertakes a fund raising activity for the repair of the church. Are incomes taxable? it is taxable because the activity is foreign to the function and nature of the church.
the proceeds being for the absolute use of the church is immaterial
◘ If the property is not owned by the REC but is merely leased by a private owner to the former, there is no tax exemption on the property as t the owner.
Reason ADE is required
(the basis of taxability of REAL property = ownership!) Doctrine of Wage
test of exemption on real properties which mandates that such properties must be ADE used for religious, charitable or educational purposes.
Reconciliation:
● usage – basis of exemption from real property tax ● ownership – basis of taxability of real property
“The Tower” vis-à-vis taxation and license and in relation to the constitutional safeguards on freedom of worship ( free exercise clause)
● license as pre-activity; without recurring a license, one cannot engage validly in said activity (like selling “the tower’)
it is violative of the free worship clause
● Tax as activity; wherein the tax is collected after the activity is undertaken (like from the profits of selling “the Tower” is not violative of free worship clause.
No public money can be appropriated for religious purposes! Reason : Taxes can only be levied for public purpose. exceptions!
public money may be appropriated for the use, support and benefit of a priest, preacher, minister, rabii, imam… for: (assigned to)
P – penal institutions L - leprosarium A – armed forces G – govt orphanage Freedom of Religion
superior to non-impairment clause inferior to the power of taxation
The government is perpetually exempt from the payment of Real Property Tax (RPT)… except: when the benefit is transferred to a private individual or entity… ◘ NAPOCOR Case
this is the exception to the rule that only property owners are required to pay RPT!!! Tax Exemption
majority of ALL the members of Congress the govt cannot exempt what it cannot tax Donor’s Tax
computation of its tax period is cumulative! Q? When is tax splitting valid?
A! When it is given on several taxpayers! ◘ illustration :
valid not valid 12/3/01 1/1/02 1/1/02 1/2/02
= tax evasion
= donor’s tax cumulative CONSTITUTIONAL LIMITATION
1. non – diversification of tax collection
2. tax exemption – vote of majority of all members 3. non – delegation of power of taxation
4. non – impairment of the jurisdiction of SC for review tax cases “Free Working Clause”
PLAGO
non-profit institution or organization
Majority members (vote of congress) for the validity of Tax Exemption!! Non-diversification
Non-delegation of the power of taxation INHERENT LIMITATIONS
1. Territoriality can only be exercise the power of taxation within its boundaries 2. Taxation is inherently legislative
3. Taxation is subject to international comity or treaty 4. The govt cannot tax itself
5. Taxation is for public purposes public welfare
6. Money cannot be appropriated to support private individual or groups of individuals SITUS OF TAXATION
Factors that will determine situs of taxation: 1. nature or kind of tax imposed
2. subject matter of the tax 3. citizenship of the TP 4. residence of the TP 5. source of income
6. place of exercise of business or occupation being taxed 7. place where activity that produce income was held or done ● privilege taxes where you exercise your profession
● property location ESCAPES OF TAXATION
FORMS
1. Those that will not result in loss in revenue to the government! a. Shifting
passing the burden of taxation from statutory taxpayer to the buyer without violating the law b. Capitalization
seller lowers the prices of commodity provided taxes are shouldered by the buyer c. transformation
the manufacturer absorbs the additional taxes and it increases the quantity of production to lower cost resulting to the transformation of the tax into a gain through the medium of production
2. Those that will not result in loss in revenue to the government a. tax invasion / dodging
illegally reducing the payment of taxes, once caught, the person is liable for penalties (civil & criminal) b. Tax avoidance / tax minimization scheme
Reducing the burden of taxation through legally permissible means no penalties c. Tax exemption
Immunity / freedom / privilege from payment of taxes to which others are obliged to pay. KINDS OF TAX EXEMPTION
1. express 2. implied 3. constitutional 4. statutory 5. contractual 6. total 7. partial ◘Tax exemption
an immunity, privilege or freedom from payment of a charge or burden to which other persons or corporations who are generally within the same state or taxing district are obliged to pay
non -transferable
Tax exemptions are not automatic, nor transferable, always revocable, personal, always disfavored!!! Allowed under clear and unequivocal provisions of law.
● Real Property Tax
exempt based on the Doctrine of Usage and not Doctrine of Ownership ● Local Government
are not allowed to grant tax exemption
shared revenues
if one LGU exempts a taxpayer, the LGU can only waive its share (what is due it), it has no authority or power to exempt shares not due it.
◘ Tax Amnesty
general p[pardon of liabilities of erring taxpayers, so that this taxpayers will be given a chance to reform and become part of the society with a clean state
● OIEP not valid
32 % legal tax when there is amnesty; it can be lowered to 15 %. ● effects:
condonement of all increments and penalties (criminal, civil and administrative)
books are cleared and are no longer subject for assessment ◘ T 1 avail tax amnesty at 20%
T2 regularly pays its taxes at 32% ◘ Q? Can T2 avail of TR / TC at 12%
No! There is no invalid payment (OEIP). Perpetual tax exemption REC
Situs of Taxation (place where to pay)
1. Personal Tax (poll tax ; CDT)
residence of the taxpayer 2. Business Tax
place of business
branches (place where the branch is located) <no consolidation> 3. Income Tax
consolidated in one return 4. Professional Tax
where the taxpayer intends to exercise his profession 5. Transaction Tax
where the transaction took place 6. RPT
where the property is located
under the absolute umbrella of the principle of territoriality INCOME TAXATION
KINDS:
1. global – used by corporations ( “put them all together” 2. schedular – used by individual taxpayers (segregation) Gross Income Formula
no deductions ☼ applies to:
1. compensation income earners (partial / total) 2. non-resident aliens not engage in trade in the Phils 3. special aliens can pay as low as 32%, UBO
Net Income Formula
Gross Income less Allowable deductions ☼ applies to:
1. self – employed taxpayers in business 2. domestic corp
3. non-resident foreign corp 4. special corporation PASSIVE FORMULA
an income derived without the active participation of the tax payer ie.. an interest to the bank
If withholding tax comes in, income tax cannot set in.. and vice versa!!! ◘ Incomes from illegal activities
taxable! non deductable!! ◘ Money found (owner unknown)
taxable to finder
subject to reimbursement by the true owner if later on known!! ◘ Money embezzled
not taxable because you know the true owner ◘ Swindling, theft, robbery and embezzled
not taxable!! ◘ fruit of labor
taxable
◘ prize in a game of chance not taxable ◘ Contest
deliberate intent and won taxable no deliberate intent and won not taxable ◘ win a prize as representative of the PHILs
exempt
◘ representing provincial, district meet… it depends! if sponsored by the sports commission exempted if not sponsored by the sports commission taxable!! Self-help Doctrine
not applicable ◘ retirement benefits
exempt only once qualifications:
private retirement benefits Concur:
age Yrs of service
50 10 Exempt
58 8 Taxable
45 20 Taxable
If tax exempt only once
Tax avoidance : choose whichever is higher ◙ How to compute Inputted Income
$
$ (value of inputted) Gross income (one tax period)
ECR applies inputted exempt
ECR do not apply inputted not exempt ◙ Capital
not subject to income tax only the fruits, gains, profits profits taxable only if separated from the capital test Severance Control Test
not separated not taxable proper gains
not yet actually realized, therefore growth not necessarily taxable, it must be covered from the capital
PERSONAL INTANGIBLE PROPERTIES S – shares of stock
O - obligations B – bonds
GR – wherever they are physically located regardless of the residence o f the owner shares of stock
◘ illustrations: A. buy stocks
F SMC
issued cert of ss
F leaves the country: the govt can tax the SS. The shares are issued by a domestic corporation, subject to Phil tax laws (dividend tax)
B.
F brings foreign shares Phils
If the shares are used in the furtherance of profit, then it will have business situs in the Phils
taxable
no business situs Not taxable C.
85 % of operation in the Phils
considered issued by domestic corporation, local shares are taxable ie.. Subic; factories)
Taxpayer’s Suit
if the source of the fund is taxation, it should be for public purpose, if not for public purpose a taxpayer’s suit can be filed.
EXCLUSIONS
items that are suppose to be income because they make you rich but the Code exclude then; not to be included for purposes of computing Gross Income…
applicable to all kinds of taxpayers!!! ◚ compensation received from injuries sustained
T on the way to work sideswiped by a car (MV) T suffered physical injuries MV offered to settle for 50K
50K – not taxable but…
T (e’e) driving a delivery truck with goods collided with a 10-wheeler truck of SD SD offered to settle
20K – lost profit damages to property not for physical injuries sustained ◚Retirement Benefits mandatory
