INTRODUCTION
Philippine taxes cover national and local taxes.
National taxes are imposed and collected by the national government through the
Bureau of Internal Revenue (BIR) while local taxes are collected by local government
units.
Most of the taxes that apply to your business are administered by the national
government, which are as follows:
• capital gains tax;
• income tax;
• dividends tax;
• documentary stamp tax;
• withholding tax on income payments;
• value added tax;
• donor’s tax; and
• branch profit remittance ta
Local government units, on the other hand, are subject to limitations in imposing taxes to
business entities. The exercise of local government taxing power for businesses are
limited by the Constitution to the following:
• local business tax; and
• real property tax.
NATIONAL AND LOCOAL TAX ASSESSMENT
Tax Assessment
It is the determination of amounts due from a person obligated to make payments. In the
context of national internal revenue collection, it refers to the determination of the taxes
due from a taxpayer under the NIRC.
Kinds of Assessment
a. Self-assessment
a system whereby taxpayers themselves calculate or determine their own tax
liabilities. The taxpayer subsequently files a tax return together with payment for the
tax liabilities so calculated on or before the due date.
b. Deficiency assessment
Deficiency assessments are issued by the BIR if, after the conduct of an audit or
investigation of the of the taxpayer, the BIR, through the authorized Revenue Officer,
finds that the tax return contains an under-declaration of income or over-deduction of
expenses, or that the taxpayer did not file a tax return at all.
c. Void assessment
the court ruled that an assessment which merely reiterated in the preliminary collection
letter notices the deficiency taxes due as found in the PAN (Issuance of Preliminary
Assessment Notice) and the FAN/FLD (Final Assessment Notice or Final Letter
of Demand)
d. Erroneous assessment
Presupposes that the taxpayer is subject to the tax but is disputing the correctness of
the amount assessed.
It is an assessment that deviates from the law and creates a jurisdictional defect, and
that is therefore invalid. It is an assessment in excess of fair market value as a result
of a clerical mistake on the part of the assessing authority.
ASSESSMENT PROCESS
1. Letter of Authority
A Letter of Authority is an official document the Commissioner of Internal Revenue
issues to audit taxpayers under the jurisdiction of the BIR national office. In cases
where taxpayers under the jurisdiction of the BIR regional offices are the subject
of an audit, the Regional Director issues the LOA.
2. Notice of Discrepancy or Informal Conference
An NIC is a written notice issued by the BIR informing the taxpayer of the
preliminary findings and discrepancies found during an audit. It also contains an
invitation to schedule a conference with the revenue officers, where the taxpayer
is allowed to explain his side and submit supporting documents to the examiner.
3. Issuance of Preliminary Assessment Notice (PAN)
The Pre-Assessment Notice is a communication issued by the Regional
Assessment Division, or any other concerned BIR Office, informing a Taxpayer
who has been audited of the findings of the Revenue Officer, following the review
of these findings.
4. Reply to PAN
If the taxpayer is still found to be liable for deficiency taxes, the investigating officer
shall endorse the case for review and approval for issuance of a Preliminary
Assessment Notice (PAN). Upon receipt of the PAN, the taxpayer has 15 days to
provide its reply to PAN.
5. Issuance of Final Assessment Notice or Final Letter of Demand (FAN/FLD)
or Notice of Assessment
If the taxpayer fails to respond within fifteen (15) days from date of receipt of the
PAN, he shall be considered in default, in which case, a Formal Letter of Demand
and Final Assessment Notice (FLD/FAN) shall be issued calling for payment of the
taxpayer's deficiency tax liability, inclusive of the applicable penalties.
6. Protest
The protest letter may be in the form of request for reinvestigation or request for
reconsideration. A request for reinvestigation is recommended if there are still
supporting documents which cannot be submitted within the 30-day period for the
protest letter.
A taxpayer who does not agree with the assessment may file a protest within 30
days following the receipt of the same. The protest may be in the form of request
for reconsideration if the plea is based on existing records without the need of
additional evidence.
7. Denial of Protest and issuance of Final Decision on Disputed Assessment
(FDDA)
The FDDA pertains to the final decision of the Commissioner of Internal Revenue
(CIR) or his duly authorized representatives on the protest to Final Assessment
Notice (FAN). An FDDA may serve as a closing stage for taxpayers should they
choose to end the assessment by paying the amount stated. On the other hand, in
case of disagreements, the taxpayer may also go the route of requesting for a
reconsideration from the CIR (if the FDDA was previously rendered by the
Regional Director) or filing a petition for review before the Court of Tax Appeals
(CTA).
8. Remedies of TP in case of denial of protest or inaction by CIR or his duly
authorized representative; Appeal.
If the taxpayer's protest is not acted upon by the CIR within 180 days from the date
of filing, the taxpayer may: (1) appeal to the CTA within 30 days from the expiry of
the 180-day period; or (2) wait for the final decision of the CIR and then appeal
said decision to the CTA within 30 days after receipt thereof.
NATIONAL AND LOCAL TAX COLLECTION
Tax collection is the way of the government to raise funds for its necessary expenditures.
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It needs to budget to support the construction and improvement of roads, bridges and
highways as well as to funds to take care of the welfare of the underprivileged and
disadvantaged people of the nation.
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The contribution can be in the form of individual payments from the people’s earnings
or as “add-ons” to some goods purchased or goods enjoyed.
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The power is inherent or natural to the state. It established a law on taxation in which
the function of legislature or the law-making branch of the government. It lists systems
and procedure known as the national internal revenue code (nirc) that will serve as a
guide the executive branch of government and the people as to where, when, how
and how much should be collected and paid.
A. Summary Proceedings
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Is a civil or criminal proceedings in which the formal procedures normally
applicable to matters are dispensed with. (You do not need anymore take the
normal processes but rather just do the things that are expected which is the
collection)
a. Distraint, Levy, or Garnishment
i. Distraint (personal property)
1. Actual Distraint – personal property is physically taken by the
government and is offered for sale at public auction. For
example, Since the taxpayer do not pay tax, since he/ she
can’t pay in cash, the government uses a car or any property
instead. (that property is not for the use of the government but
they offer it for sale of public option to pay the tax due of the
taxpayer, incase that it have excess, the government will give
it to the taxpayer)
2. Constructive Distraint – the person in possession of personal
property is made to sign a receipt undertaking that he / she
will preserve the property and will not dispose of the property
without the express authority of the BIR. (The BIR did not
physically get the property but rather you are just preserving
the property. It is the protection of the government in case you
are not going to be able to pay the tax)
ii. Levy (real property) – The seizure by the government of real
properties and interest in or rights to such properties in order to
enforce the payment of taxes. [Observe: Right of Redemption] (your
land or building will be put in auction. The taxpayer can redeem or
buy back the land within 1 year after the auction)
iii. Garnishment – distraint of bank account. (The government can ask
the banks to freeze the taxpayers bank account)
b. Tax Lien – is the legal claim against the asset of individual or business that
fails to pay taxes owed to the government.
c. Forfeiture – loss of any property without compensation as a result of
defaulting an obligation, or as a penalty for illegal act.
d. Compromise and Abatement
i. Compromise
Grounds: The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax. A reasonable doubt as to the validity
of the claims against the taxpayer exist. (The government can
compromise because they can see that he / she cannot pay taxes)
Minimum Compromise Rate: 10%, 20%, or 40% of basic tax
assessed
ii. Abatement (cancellation of tax liability)
Grounds: The tax or any portion thereof appears to be unjustified or
excessively assessed; or
The administration and collection costs involved do not justify the
collection of the amount due.
e. Suspension of Business Operations
Duration: not less than 5 days
Grounds: understatement of taxable sales or receipts by 30% or more.
f. Informer’s Reward
People informed the government that there’s a business that do not pay
taxes. They do it for the reward which is 10% of revenue, surcharges, or
fees recovered or P1,000,000 whichever is lower. (10% or P1,000,000 of
what the BIR will collected from those business will go to the informer)
g. Surcharges and Penalties
o When taxpayers pay the taxes late, there can be surcharges and
penalties like interest and compromise in order for it to not proceed into
criminal action.
o The BIR sets deadline on when you are going to pay your tax, if you are
not going to do it, the government uses surcharges or penalties for them
to collect.
h. Installment Payments
 When the taxpayer cannot pay in full, in order for the government to
collect, they allow installment but it have interest.
B. Judicial Proceedings – any proceedings over which a judge presides. (You can
bring the nonpayment of tax to court, since that nonpayment of tax is both a civil
and a criminal offence)
a. Civil Action – there are a violation to the rulings of the BIR.
b. Criminal Action
Since it is the obligation of the taxpayer to pay taxes, you may file a civil acion
or a criminal action.
HOW TO BE FULLY COMPLIANT AND EQUIPPED OF KNOWLEDGE IN
ADDRESSING SUCH ISSUES:
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Know what tax law is applicable to you
List all the necessary forms and returns that you need to file
Know WHAT, WHEN, and WHERE to file
Have a basic understanding of the tax laws and comply them in a timely manner
All revenue authorities are generally required to achieve as good a compliance outcome
as possible. The primary goal of a revenue authority is collect the taxes and duties
payable in accordance with the law and to do this in such manner that will sustain
confidence in the tax system and its administration. As the government will not be able to
function without the taxes paid to it, it is incumbent upon the taxpayers to pay the correct
taxes due from them. Needless to say, funds are needed for infrastructure, education,
and relief from crisis, among many others.
It is very important for taxpayers not only to comply but also to know their tax obligations.
Otherwise, they will suffer the consequences of non-compliance Interest and penalties
alone on missed tax payments can cost taxpayers hundreds of millions of pesos. Mere
failure or refusal to issue receipts and invoices, when required, could subject them to
criminal prosecution. Unlawful pursuit of business and willful failure to pay will lead them
to jail. Failure to file returns and report income and transactions which are subject to tax
is likewise punishable by law. The Bureau of Internal Revenue can also suspend business
operations and even close down business establishments, for some instances involving
violations of the Tax Code.
While we are in the present Digital Era and given the ever-evolving landscape of
Philippine taxation, taxpayers must be able to adapt to change. We have to keep abreast
of the tax developments, read and understand the issuances of the BIR and the decisions
rendered by the courts on tax cases that are released from time to time, and attend tax
trainings/seminars/webinars for tax updates. Going by the famous doctrine of ‘Ignorance
of the law is never an excuse,’ it is the duty of the taxpayer to know all tax obligations that
s/he need to fulfill.
The assessment process has three main stages: the informal conference, the
preliminary assessment, and the final assessment.
1. Informal conference - After examining your documents and records, the BIR
examiner will issue a Notice for Informal Conference, giving you a chance to present
documents and reconciliations explaining why the initials findings of the BIR should
be cancelled. If, despite your presentation of explanation and documents, the
examiner is not convinced, the Informal Conference shall be concluded.
2. Preliminary assessment - The examiner shall proceed with the issuance of the
Preliminary Assessment Notice (PAN). Upon receipt of the PAN, you should submit
your reply within 15 days. Again, the reply shall contain reconciliations and
explanations why the assessment must be cancelled partially or fully. If the BIR
disagrees with your explanations, the BIR shall issue the Formal Letter of Demand
and Final Assessment Notice (FLD/FAN), calling for the payment of the deficiency tax
liability, inclusive of the applicable penalties.
If you do not agree with the findings in the FLD/FAN, submit a protest within 30 days
from receipt thereof by filing either a request for reconsideration or a request for
reinvestigation. It is important to remember that the 30-day period is not extendible.
Failure to file a protest will make the assessment final, executory, and demandable.
If the protest is denied, in whole or in part, by the Commissioner’s duly authorized
representative, you may either: (i) appeal to the Court of Tax Appeals (CTA) within 30
days from the date of receipt of the said decision; or (ii) elevate your protest through
a request for reconsideration to the Commissioner within 30 days from the date of
receipt of the said decision. Again, failure to act after receiving the decision within the
30-day period will make the assessment final, executory, and demandable.
3. Final assessment - You also need to check the date when the FAN was issued. It
could have been issued past the three-year prescription date. Hence, any FAN issued
is already prescribed, and you can cite such prescription as a defense against the
assessment. Take note that prescription dates for the different types of taxes being
examined may differ. Again, technical rules are important to determine when the
prescription will set in.
The guidance note provides a step by step description of a strategic process for the
identification and treatment of tax compliance risks, and associated monitoring and
evaluation activities that are required to gauge the effectiveness of the treatment
strategies implemented. In addition to describing the basic principles of risk management
in a tax compliance context, the guidance note includes many practical examples drawn
from revenue authorities in member countries to illustrate particular approaches and their
impacts.
A compliance risk assessment measures the gap between what your compliance program
does versus what your compliance program should do to pass muster as an “effective”
program in the eyes of regulators. The mitigation steps you take reduce your compliance
risk until it achieves that goal of effectiveness. The most important thing is this: your
compliance efforts should be aimed squarely at the risks that are most critical to your
business. An effective risk assessment must also include a clear picture of how your
organization operates. In other words, you need to know the “who, what, where, when,
and how” of the day-to-day operations happening on the ground in your company.