Reviewer in Taxation(Lifted from San Beda Reviewer 2012)DISTINCTIONS

GENERAL PRINCIPLES

Comparison of Power of Taxation with Other Inherent Powers

TaxationPolice PowerEminent Domain

Purpose

To raise revenueTo promote public welfare through regulationsTo facilitate the taking of private property for public use

Amount of Exaction

No limit, but as much as possible, must be equal to the needs of Govt in order to avoid a deficit scenario for the State.Limited to the cost of regulation, issuance of the license or surveillance (fee)No amount imposed but rather the owner is paid the market value of the property taken

Benefits Received

No special or direct benefit is received by the taxpayer, merely general benefit of protectionNo direct benefit is received; a healthy economic standard of society is attainedA direct benefit results in the form of just compensation to the property owner

Non-Impairment of Contracts

Contracts may not be impairedContracts may be impairedContracts may be impaired

Transfer of property rights

Taxes paid become part of public fundsNo transfer but only restraint in its existenceTransfer is effected in favor of the State

Scope

All persons, property and excisesAll persons, property, rights and privilegesOnly upon a particular property

Who Exercises the Power

May be exercised only by the government or its political subdivisionsMay be exercised only by the government or its political subdivisionsMay be:a. Exercised by the government or its political subdivisions;b. Granted to public service companies or public utilities

TaxesDebt

Basis

Based on LawBased on contract or judgement

Failure to Pay

Failure to pay tax (other than poll tax) may result in imprisonmentNo imprisonment for non-payment of debt

Mode of Payment

Generally payable in moneyPayable in money, property, or service

Assignability

Not assignableAssignable

Payment

Not subject to compensation or set-offMay be subject to compensation or set-off

Interest

Tax does not draw interest unless delinquentDebt draws interest if stipulated or delayed

Authority

Imposed by public AuthorityImposed by private individuals

Prescription

Determined by NIRCDetermined by Civil Code

Taxes Toll

Definition

Demand of sovereignty for the purpose of raising public revenueDemand of ownership an amount charged for the cost and maintenance of property used

Purpose

Taxes are levied for the support of the governmentTolls are compensation for the use of anothers property

Determination of Amound

The amount of tax is determined by the sovereignThe amount of the toll is determined by the cost of teh property or of the improvement

Who may impose

May only be imposed by the StateImposed by the government or private individual

TaxesSpecial Assessments

Definition

Imposed only on persons, properties, and excisesSpecial levy on the lands 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, persons, property, income, business, etc.Levied on land

Liability

Personal liability of the tax payerCannot be made a personal liability of the person assessed

Basis

Based on necessity and partially on benefitsBased solely on benefits

Applicability

General applicationSpecial application only as to a particular time and place

TaxLicense Fee

Basis

Based on the power of taxationBased on police power

Purpose

Purpose is revenuePurpose is regulation

Limitation on Amount

Amount is unlimitedAmount is limited to the cost of:1. Issuance of license2. Inspection and surveillance

When paid

Normally paid the start of businessNormally paid before the commencement of business

Surrender

Taxes, being the lifeblood of the State, cannot be surrendered except for lawful considerationLicense fee may be with or without consideration

Effect of non-payment

Non-payment does not make the business illegal but may be ground for criminal prosecutionNon-payment makes the business illegal

TaxPenalty

Definition

Enforced proportional contributions from persons and propertySanction imposed as a punishment for violation of law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty

Purpose

Intended to raise revenueDesigned to regulate conduct

Authority

May be impose only by the governmentMay be imposed by the:1. Government2. Private individuals or entities

TaxTariff

All embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposeA kind of tax imposed on articles which are traded internationally

TaxCompromise Penalty

Basic imposition on persons, property and excisesCollected as a compromise in cases involving violations of the Tax Code, rules or regulations

TaxSubsidy

Levied by the law making body of the State for the support of the government and for public needsA legislative grant of money in aid of a private enterprise deemed to promote the public welfare

TaxRevenue

A source of revenue of the governmentA broad term that includes not only taxes but income from other sources as well

Tax AvoidanceTax Evasion

Validity

Legal and not subject to criminal penaltyIllegal and subject to criminal penalty

Effect

Minimization of taxesAlmost always results in the absence of tax payments

INCOME TAX

IncomeCapital

Denotes a flow of wealth during a definite period of time. All wealth other than as a mere return of capital.Fund or property existing at one distinct point of time, which can be used in producing goods or services

Service of wealthWealth

Income is subject to taxReturn or capital is not subject to tax

Fruit Tree

Taxable EstateTaxable 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 heirsThe 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 20,000The 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 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.The income tax return shall be filed if the gross income is P20,000 or more and the tax paid by the fiduciary.

Share of A Partner in GPPShare of A Partner in Taxable or Business Partnership

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.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. 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)Payments made to a partner for services rendered shall be considered as compensation income subject to Sec. 24 (A)

Managerial/ Supervisory EmployeesRank and File Employees

Compensation/ Salaries/ Wages

Subject to Income TaxSubject to Income Tax

Fringe Benefits

Subject to fringe benefit tax (FBT)Forms part of compensation therefore subject to income tax; Subject to exceptions

De Minimis Benefits

Income but not compensation, hence not taxableIncome but not compensation hence not taxable

ExclusionsDeductionPersonal Exemptio

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.Refer to the amounts which the law allows to be subtracted from gross income in order to arrive at net income.Are arbitrary amounts allowed by law to an individual taxpayer, theoretically to provide for personal and living expenses.

Generally a receipt which is excluded from taxable income. Is not a receipt but is generally an expenditure which is permitted to be subtracted from income to determine the amount subject to tax.It is an immunity or privilege, a freedom of charge or burden to which other are subjected.

Something earned or received by the taxpayer which do not form part of gross income.Something spent or paid in earning gross incomeTheoretical provision of law for the personal and living expenses of the individual.

Allowed for all kinds of taxpayers, whether natural or juridical.Generally allowed for all kinds of taxpayer, whether natural or juridical.Allowed ONLY to individuals.

May be availed of by a NRA-ETB whether or not there is reciprocity.May be availed of by NRA-ETB whether or not there is reciprocity.May be availed of by NRA-ETB only upon the basis of reciprocity.

May be subtracted ONLY from income derived from trade, business or exercise of profession.May be subtracted from both:a. Compensation income; orb. Income derived from trade, business or exercise of profession

Tax creditDeduction

Reduces the Philippine Income tax liabilityReduces taxable income upon which tax liability is calculated from

It is subtracted from the tax (net) amount to be paid.Subtracted from gross income before tax is computed.

Final Withholding Tax SystemCreditable Withholding Tax System

Amount of Tax Collected

Constituted as a full and final payment of the income due from the payee on the said income.Intended to equal or at least approximate the tax due from the payee on the said income.

Who is primarily liable

Liability rests primarily on the withholding agentLiability rests upon the taxpayer

Need to File a Return

Payee is not required to file an income tax return for the particular incomeIncome recipient is still required to file an income tax return and/or pay the difference between the tax withheld and the tax due on the income.

Coverage

a. All income subject to final taxes (e.g. passive gross income of NRA-NETB)b. Fringe benefitc. Informers reward to Persons instrumental in the discovery of violations of the NIRC and the discovery and seizure of smuggles goodsThose income payments covered by the expanded withholding tax.

Examples:Professional fees, talent fees,Fees paid to medical practitionersIncome payments to partners of GPP

VALUE ADDED TAX (VAT)

Sale on Installment PlanSale on a Deferred Plan

Initial payment do not exceed 25% of the gross selling priceInitial payments 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.Transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale.

The buyer of the property can claim the input tax in the same period as the seller recognized the output tax.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 payments shall be subject to output VAT.Payments that are subsequent to initial payment shall no longer be subject to output VAT.

Automatically Zero-ratedEffectively 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.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

No need to file an application form and to secure BIR approval before the sale. The sale is zero-rated automatically.An application for zero-rating must be filed in and approved by the BIR before the 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 and Freeport zones enterprises are automatically zero-rated.Sales to foreign embassies and its personnels are effectively zero-rated provided that:1. The sale has been made to the embassies in their official capacities; and2. 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 SalesVat-exempt 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.Exemption only as it removes the VAT at the exempt stage.

VAT payer can claim and enjoy a credit or refund for the input tax. The benefit is 100% of the tax. (total relief)VAT payer cannot claim a credit or refund for the input tax (which could result to increased prices of goods or services) (partial relief)

Still considered as taxable sales for the purpose of measuring turnover sales VAT registration is required.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 TransactionsExempt Party

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.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.

Transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.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-VAT taxpayer.

TRANSFER TAXES

Estate TaxDonors Tax

Tax on privilege to transfer property upon ones death.Tax on privilege to transfer property during ones lifetime.

Taxpayers:Individuals onlyTaxpayers:Individuals and Corporations

Generally imposed on Donations Mortis CausaGenerally imposed on Donations Inter Vivos

Tax Rate are relatively higher (5-20%)Tax Rate lower (2-15%)

Extension for payments is allowedExtension for payments is not allowed

Exemption from net estate per table is P200,000Exemption from net gift per table is P100,000

Estate TaxInheritance Tax

Basis

Tax on the privilege to transfer property upon ones death.Tax on the privilege to receive property from the deceased.

Who pays the tax

Paid by the estate represented by the administrator or executor.Paid by the recipients of the properties of the estate.

NIRC REMEDIES

Table Of Prescriptive Periods

Normal or Ordinary AssessmentAbnormal or Extraordinary AssessmentCollection Without Assessment

Prescriptive Period of Assessment

3 years from the last day prescribed by law for the filing of the return, or if filed beyond prescribed by law from the day the return was filed.10 years from discovery of non-filing of return or filing of false or fraudulent returnNo prescriptive period for assessment when the government opts to collect without assessment

Prescriptive Period For Collection

3 years from issuance of assessment, unless there is fraud in 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)5 years from the date of final assessment10 years from discovery of non-filing or fraudulent or false return

ReplyProtest

Period to File

Taxpayer is given 15 days from receipt of the PAN to make his written reply thereto.Taxpayer is given 30 days from the date of the receipt of the FAN to file his protest.

Sufficiency

Due to the shorter period of time given to make a reply, the taxpayer generally does not respond in an adequate manner to the specific findings of the revenue officerUsually sufficient and comprehensive to explain the legal and factual bases why the assessment is incorrect, and certain documentary evidence 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 makes the taxpayer in default and authorizes the revenue official to issue the FAN. However, no liability for additional or deficiency tax arises from such failure.Failure to file a timely protest to FAN makes the formal assessment final and executor, and the taxpayer loses his right to contest the assessment, at the administrative and judicial levels, even if such assessment is weak or has no legal basis.

Directory vs Mandatory

Filing of the reply is directory on the part of the taxpayer.Due to the consequences, it can be said that the filing of a protest against an assessment is mandatory and had to be made on a timely manner.

Delinquency TaxDeficiency Tax

Collection

Delinquent tax can be immediately collected administratively through the issuance of a warrant of distraint and levy, and/or judicial action. Deficiency tax can be collected also through administrative and/or judicial remedies but has to go through the process of filing the protest by the taxpayers against the assessment and the denial of such protest by the BIR.

Civil Action

The filing of the civil action for the collection of the delinquent tax in the ordinary court is a proper remedy.The filing of a civil action at the ordinary court for the collection of a deficiency tax 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 administrative penalties such as 25% surcharge, interest, and compromise penalty.A deficiency tax is generally not subject to the 25% surcharge, although subject to interest and compromise penalty.

DistraintLevy

As to the properties covered

Personal PropertyReal Property

How Effected

Distraint is effected by the seizure of the goods, chattels or effects.Levy shall be effected by writing upon the duly 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 exhibited in not less than 2 public places in the municipality or city where the distraint was made. (One place of posting is the Office of the Mayor.)Within 20 days after the levy, the real property will be advertised for sale for a period of at least 30 days. The advertisement shall be effected by posting a notice at the main 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 or his deputy in behalf of the National Government under Section 212 of the NIRC.The Internal Revenue Officer conducting the sales shall declare the property forfeited in favour of the government under Section 215 of the NIRC.

Right of Redemption

The taxpayer is not given the right of redemption with respect to distrained personal property.The right of redemption is granted in case of real property levied upon and sold, or forfeited to the government.

Right of Pre-emption

With right of pre-emptionWith right of pre-emption

CompromiseAbatement

Nature

Involves a reduction of the taxpayers liabilityInvolves the cancellation of the entire tax liability of a taxpayer

Officer/s authorized to compromise/abate

CIR and Regional Evaluation BoardCIR

Grounds

1. Reasonable doubt as to validity of assessment; or2. Financial incapacity of taxpayer1. The tax or any portion thereof appears to be unjustly or excessively assessed; or2. The administration and collection costs involved do not justify the collection of the amount due.

ReconsiderationReinvestigation

Involves re-evaluation of assessment based on existing records.Involves presentation of newly discovered or additional evidence.

It does not toll the Statute of LimitationsIt tolls the Statute of Limitations

Tax RefundTax Credit

The taxpayer asks for restitution of the money paid as tax.The taxpayers asks that the money so paid be applied to his existing tax liability.

Two-year period to file claim with the CIR starts after the payment of the tax or penaltyTwo-year period starts from the date such credit was allowed (in case credit is wrongfully made).

Local TaxationReal Property Taxation

LGUS authorized to levy the taxes

Provinces, Cities, Municipalities and BarangaysProvinces, Citites and Municipalities in Metro Manila

Power or Authority to Grant Tax Exemptios

Expressly provided (Sec. 192, LGC)No power to grant tax exemptions.Exemptions from RPT granted under Sec. 234, LGC granted by CONGRESS

Date of Accrual

Unless otherwise provided in the LGC, all local taxes, fees or charges shall accrue on the 1st day of January of each year; however, new taxes, fees or charges or changes in the rates thereof, shall accrue on the 1st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates (Sec. 166, LGC)On the 1st day of January

Manner of Payment

Maybe paid in quarterly instalmentsFour equal instalments

Time of Payment

Within first 20 days of January or of each subsequent quarter as the case maybe1st on or before the 31st of March2nd on or before 30th of June3rd on or before 30th of September4th on or before 31st of DecemberException: special levy

Prescriptive Period of Assessment

Within 3 years from the date they become dueNo express provision on prescriptive period of assessment

Prescriptive Period of Collection

Within 5 years from the date of assessment by administrative or judicial action; within 10 years from the discovery of fraud or intent to evade paymentWithin 5 years from the date they become due; within 10 years from the discovery of fraud or intent to evade payment

Remedies

Governments Remedies:1. Governments lien2. Civil Remedies;a. Administrative actioni. Distraintii. Levyb. Judicial action for tax collection

Taxpayers Remedies:1. Questioning the Constitutionality of the ordinance before the Secretary of Justice2. Protest against the assessment3. Claims for refund or tax creditNote: payment under protest is not necessary)Governments Remedies:1. Governments lien2. Civil Remedies:a. Administrative action levy of real propertyb. Judicial action for tax collection

Taxpayers Remedies:1. Questioning the Constitutionality of the Local Tax Ordinance before the Secretary of Justice2. Protest against the assessment witha. LBAA then tob. CBAA3. Claims for refund or tax creditNote: payment under protest is generally necessary)

LOCAL TAXATION

Local Government TaxationReal Property Taxation

Imposition of license, taxes, fees and other impositions, including community tax as a means to create its own sources of revenue.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.

Business TaxIncome 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.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.

Paid at the beginning of the year as a fee to allow the business to operate for the rest of the year.Due on or before the 15th day of the 4th month following the close of the taxpayers taxable year.

Prerequisites to the conduct of the business.Due when the taxpayer has earned income as a result of the conduct of its business.

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