CHAPTER 1: INTRODUCTION TO INCOME TAXATION TAXATION - May be defined as a State Power, a legislative process and a mode of government cost distribution. a. As a State Power – is an inherent power of state to enforce a proportional contribution from its subjects for public purposes. b. As a Process- is a process of levying taxes by the legislature of the state to enforce a proportional contribution from its subjects for public purposes. c. As a mode of cost distribution – the State allocates its costs or burden to its subjects who are benefited by its spending. THEORY OF TAXATION - Government necessity for funding. BASIS OF TAXATION PUBLIC SERVICES GOVERNMENT PEOPLE TAXES RECEIPTS OF BENEFITS - - - Every citizen and resident of the State directly or indirectly benefits from the public services rendered by the government. Benefits – Usage of public infrastructures, access to public health or educational services, protection and security of a person and property, or simply comfort of living. Benefits receipt are conclusively presumed, therefore, the citizens cannot avoid payment of taxes. THEORIES OF COST ALLOCATION - Taxation is mode of allocating government costs or burden to people. - There are 2 considerations in the exercise of taxation power. 1. Benefit Received Theory - The more benefit one receives from the government, the more taxes to pay. 2. Ability to Pay Theory - Required to pay based on their relative capacity to sacrifice for the support of the government. - Those who have more should be tax more even if they benefit less from the government. - Those who have less should be tax less even if they benefit more from the government. ASPECTS OF THE ABILITY TO PAY THEORY 1. Vertical Equity - One’s ability to pay is directly proportional to the level of his tax base. - Gross concept 2. Horizontal Equity - Consideration of the particular circumstances of the taxpayer. - Net concept LIFEBLOOD DOCTRINE - - Taxes are essential and indispensable to the continued subsistence of the government. Without taxes, the government would be paralyzed for lack of motive power to activate or operate it. IMPLICATION OF LIFEBLOOD DOCTRINE 1. Tax is imposed even in the absence of Constitutional Grant. 2. Claims for tax exemption are construed against taxpayers. 3. The government reserves the right to choose the objects of taxation. 4. The courts are not allowed to interfere with the collection of taxes. 5. In income taxation: a. Income received in advance is taxable upon receipt. b. Deduction for capital expenditures and prepayments is not allowed as effectively defers the collection of income tax. c. A lower amount of deduction is preferred when a claimable expense subject to limit. d. A higher tax base is preferred when the tax object has multiple tax base. INHERENT POWERS OF THE STATE - Government has its basic needs and rights which co-exist with its creation. - These rights, dubbed as “powers” are natural, inseparable and inherent to the government. - These powers are naturally exercisable by the government even in the absence of an express grant of power in the Constitution. - Inherent powers are: 1. Taxation power – power of State to enforce proportional contribution from its subjects to sustain itself. 2. Police power – general power of State to enact laws to protect the well-being of the people. 3. Eminent domain – power of State to take private property for public use after paying just compensation. “Note: comparison and similarities of the 3 powers (page 5)” SCOPE OF THE TAXATION POWER - Regarded as comprehensive, plenary, unlimited and supreme. It is not absolutely unlimited as it still has (a) inherent limitations and (b) constitutional limitations. INHERENT LIMITATIONS 1. Territoriality of taxation - Government can only demand tax obligations upon its subjects or residents within its territorial jurisdiction. - No basis in taxing foreign subjects as they do not receives any benefits. Furthermore, extraterritorial taxation will amount to encroachment of foreign sovereignty. - Two-fold obligations of taxpayers: a. Filling of return and payment of taxes b. Withholding taxes on expenses and its remittance to the government - Exception: a. Income taxation, resident citizens and domestic corporations are taxable on income derived within and outside the country. b. Transfer taxation. Resident citizens, non-resident citizens and resident aliens are taxable on transfers of properties located within or outside the country. 2. International comity - In the United Nations Convention, countries of the world agreed to one fundamental concept of co-equal sovereignty wherein all nations are deemed equal with one another. - Each country observes international comity or mutual courtesy. Hence, a. Governments do not tax the income and properties of other governments. b. Governments give primacy to their treaty obligations over their own domestic tax laws. - Under National Internal Revenue Code (NIRC) income of foreign governments are not taxed. 3. Public purpose - Tax is intended for common good. - Used only for public purpose and not on private interest. 4. Exemption of the government - Government does not tax itself as it will not raise additional funds but will only impute additional costs. - According to NIRC, government properties and income are not subject to tax. However, income of the government from its properties and activities conducted for profit are subject to tax. 5. Non-delegation of the taxing power - Legislative taxing power is vested exclusively in Congress. - What has been delegated cannot be further delegated. - Exceptions: a. Under the constitutional, local government units are allowed to exercise the power of tax to enable them to exercise their fiscal autonomy. b. Under the tariff and customs code, the President is empowered to fix the amount of tariffs to be flexible to trade conditions. c. Other cases that require expedient and effective administration and implementation of assessment and collections of taxes. CONSTITUTIONAL LIMITATIONS 1. Observance of due process of law - No one should be deprived of his life, liberty or property without due process of law. - Aspects of due process: a. Substantive due process – tax must be imposed only for public purpose, collected only under authority of a valid law and only by the taxing power having jurisdiction. b. Procedural due process – there should be no arbitrariness in assessment and collections of taxes, and the government shall observe the taxpayer’s right to notice and hearing. = there is a proper procedure for the assessments and enforcing collections. Under NIRC, (a) assessments shall be made within 3 years from the due date if filling the return or from the actual date of filling whichever is later (b) collection, shall be made within 5 years from the date of assessment. 2. Equal protection of law - Taxpayers should be treated equally both in terms of rights conferred and obligations imposed. - This rule applies where taxpayers are under the same circumstances and conditions. 3. Uniformity rule in taxation - Rule of taxation shall be uniform and equitable. - Taxpayers under dissimilar circumstances should not be taxed the same. 4. Progressive system taxation - Tax rates increases as the tax base increases. - Constitution favors the progressive as it is consistent with the taxpayers ability to pay. 5. Non-imprisonment for nonpayment of debt or poll tax - As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere inability to pay debt. - Exception: debt acquired in bad faiths constitutes estafa a crime offense punishable by imprisonment. Is non-payment of tax equivalent to nonpayment of debt? TAX DEBT Arises from law Arises from and is demand private of sovereignty. contracts Non-payment Non-payment comprises comprises public interest private interest - Constitutional guarantee that nonimprisonment for non-payment of debt does not extend to non-payment of tax except poll tax. - Poll, personal, community or residency tax. Poll tax has two components. a. Basic community tax – nonimprisonment b. Additional community tax – evasion of tax is punishable by imprisonment 6. Non-impairment of obligation and contract - Tax exemptions granted under contract should be honored and should not be cancelled by a unilateral government action. 7. Free worship rule - Government adopts free exercise of religion and does not subject its exercise to taxation. - This exemption however, does not extend to income from properties or activities of religious institutions that are proprietary or commercial in nature. 8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property taxes - The constitutional exemption from property tax applies for properties actually, directly, and exclusively used for charitable, religious and educational purposes. - The Philippine follows the doctrine of use wherein only properties actually devoted for religious, charitable, or educational activities are exempt from real property tax. - Doctrine of ownership, the properties whether or not used in their primary operations are exempt from real property tax. However, this doctrine is not applied in the Philippines. 9. Non-appropriation of public funds or property for the benefit of church, sect or system of religion - Intended to highlight the separation of religion and the state. - To support the freedom of religion, the government should not favor any particular system of religion by appropriating funds. 10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions - Government recognizes the necessity of education in state building by granting tax exemption on revenues and assets of non-profit educational institutions. - This applies only on the revenues and assets that are actually, directly, and exclusively utilized primarily for educational purposes. - Government educational institutions are exempt from income tax while the private educational institutions they are subject to minimal income tax. 11. Concurrence of majority of all members of Congress for the passage of law granting tax exemption - Tax exemption law counters against the lifeblood doctrine as it deprives the government of revenues. - Hence, exemptions must proceed only with valid basis. - As a safety net, the constitution requires the vote of the majority of all members of Congress in the grant of tax exemption. - In approval of exemption law, absolute majority (majority of all the members of congress) is required and not the relative majority. - In withdrawal of tax exemption, only a relative majority or quorum majority is required. 12. Non-diversification of tax collections - Tax collections should only be used for public purposes and never to be used for private purpose. 13. Non-delegation of the power of taxation - The principle of checks and balances in a republican state requires that taxation power as part of lawmaking vested exclusively in congress. - However, delegation may be made in matters involving the expedient and effective administration and implementation of assessment and collection of taxes. - Department of Finance and BIR may interpret or clarify the proper application of law but they are not allowed to introduce new legislation within their quasi-legislative authority. 14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases - Notwithstanding the existence of the court of tax appeals, which is a special court, all cases involving taxes can be raised to and be finally decided by the Supreme Court of the Philippines. 15. The requirement that appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments - Laws that add income to the national treasury and those that allows spending therein must originate from the House of Representatives while Senate may concur with amendments. 16. The delegation of taxing power to local government units - Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the national taxes - Local autonomy STAGES OF THE TAXATION POWER EXERCISE OF 1. Levy or Imposition - This process involves the enactment of a tax law by Congress and is called impact of taxation. - Also referred as the legislative act in taxation. - Congress is composed of 2 bodies: a. House of Representatives b. Senate - Tax bills originate exclusively in the House of Representative and not from the Senate. But they do have own versions of proposed law which is approved by both bodies. Matters of Legislative Discretion in the Exercise of Taxation a. Determining the object of taxation b. Setting the tax rate or amount to be collected c. Determining the purpose for the levy which must be public use d. Kind of tax imposed e. Apportionment of the tax between the national and local government f. Situs of taxation g. Method of collection 2. Assessment and Collection - Tax is implemented by the administrative branch of the government. - Implementation involves assessment and determination of tax liabilities of the taxpayers and collection. - This stage is referred as incidence of taxation or the administrative act of taxation. 2. - 3. - - SITUS OF TAXATION - Is the place of taxation Tax jurisdiction has the power to levy taxes upon the tax object Situs rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction of the taxing authority. Examples of situs rules: 1. Business tax situs – businesses are subject to tax in the place where the business is conducted. 2. Income tax situs on service – service fees are subject to tax where they are rendered. 3. Income tax situs on sale of goods – the gain on sale is subject to tax in the place of sale. 4. Property tax situs – properties are taxable in their location 5. Personal tax situs – Persons are taxable in their place of residence OTHER FUNDAMENTALS DOCTRINES IN TAXATION 1. Marshall Doctrine - the power to tac involves the power to destroy. 4. - - 5. - 6. - Can be used to discourage or prohibit undesirable activities or occupation. Holme’s Doctrine Taxation power is not the power to destroy while the court sits Taxation may also be used to build or encourage beneficial activities or industries by the grant of tax incentives. Prospectivity of tax laws Tax laws are generally prospective in operation. An “ex post facto law” or a law that retroacts is prohibited by the Constitution, Exceptionally, income tax laws may operate retrospectively, if so intended by the congress under certain justifiable reasons. Non-compensation or set-off Tax are not subject to automatic setoff or compensation. Taxpayer cannot delay payment of tax to wait for the resolution of a lawsuit involving his pending claim against the government. Tax is not debt hence, it is not subject to set-off Exceptions: a. Where the taxpayer’s claim has already become due and demandable such as when the government already recognized the same and an appropriation for refund was made b. Cases of obvious overpayment of taxes c. Local taxes Non-assignment of Taxes Tax obligations cannot be assigned or transferred to another entity by contract. Imprescriptibility in taxation Prescription is the lapsing of right due to the passage of time. - - - 7. - 8. - 9. - - a. - When one sleep on his right over an unreasonable period of time, he is presumed waiving his right. Government’s right to collect taxes does not prescribe unless the law itself provides for such prescription. Under NIRC; a. Tax prescribes if not collected within 5 years from the date of assessment b. In the absence of assessment, tax prescribes if not collected by judicial action within 3 years from the date the return is required to be filed. c. However, taxes due from taxpayers who did not file return or those who file fraudulent returns do not prescribe Doctrine of estoppel Any misrepresentation made by one party toward another who relied therein in good faith will be held true and binding against the person who made the misrepresentation. Government is not subject to estoppel Judicial non-interference Generally, courts are not allowed to issue injunction against the government pursuit to collect tax as this would unnecessarily defer tax collection. This is anchored on the Lifeblood Doctrine. Strict Construction of Tax Laws Taxation is the rule, exemption is the exception. When the law is clear and categorical, there is no room for interpretation, there is only room for application When the laws are vague, the doctrine of strict legal construction is observed Vague tax laws Construed against government and in favor of the taxpayers. - Vague tax law means no tax law Obligation arising from law are not presumed b. Vague exemption laws - Construed against taxpayer and in favor of the government. - Vague exemption law means no exemption law - Tax exemption cannot arise from vague inference, it must be clear and unequivocal. - Taxpayer claiming exemption must point to a specific provision of law, in clear and plain terms. DOUBLE TAXATION - Occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing. Elements of Double taxation 1. Primary element: same object 2. Secondary element a. Same type of tax b. Same purpose of tax c. Same taxing jurisdiction d. Same tax period Types of double taxation 1. Direct double taxation - Occurs when all the element of double taxation exists for both impositions. 2. Indirect double taxation - Occurs when at least one of the secondary elements of double taxation not common for both impositions. Note: - Nothing in our law prohibits double taxation. Indirect is prevalent in practice while direct is discouraged. - It is also believed to counter the rule of equal protection and uniformity in the constitution. How can double taxation minimized? 1. Provision of tax exemption - Only one tax law is allowed to apply to the object while the other tax exempts the same object 2. Allowing foreign tax credit - Both tax laws of domestic and foreign country tax the tax object, but the tax payments made in the foreign tax law are deductible against the tax due of the domestic. 3. Allowing reciprocal tax treatment - Provisions in tax laws imposing a reduced tax rates or even exemption if the country of the foreign taxpayer also give the same treatment to Filipino non-residents therein 4. Entering into treaties or bilateral agreements - Countries may stipulate for a lower tax rates for their residents if they engage in transactions that are taxable by both of them ESCAPES FROM TAXATION - The means available to the taxpayer to limit or even avoid the impact of taxation. Categories of escapes from taxation 1. Those that result to loss of government revenue a. Tax evasion – also known as tax lodging = refers to any act or trick that tends to illegally reduce or avoid the payment of tax b. Tax avoidance – also known as tax minimization = refers to any act or trick that reduces or totally escapes taxes by any legally permissible means c. Tax exemption – also known as tax holiday = refers to immunity, privilege or freedom from being subject to a tax. = granted by constitution, law or contract. = all forms of tax exemption can be revoked by Congress except those granted by the constitution and those granted under contracts. 2. Those that do not result to loss of government revenue a. Shifting – transferring tax burden to other taxpayers Forms of shifting a.1. forward shifting – this shifting follows the normal flow of distribution (manufacturer to wholesalers, retailers to consumers). common with essential commodities and services such as food and fuel. a.2. backward shifting – common with non-essential commodities where buyer have considerable market power and commodities with numerous substitute products. a.3. onward shifting – refers to any tax shifting in the distribution channel that exhibits forward or backward shifting. - Shifting is common with business where taxes imposed can be shifted or passed-on to customers. b. Capitalization – pertains to the adjustment of the value of an asset caused by changes in tax rates. c. Transformation – this pertains to the elimination of wastes or losses by the taxpayer to form savings to compensate for the tax imposition or increases in taxes Tax amnesty - Is a general pardon grant by the government for erring taxpayers to give them chance to reform and enable them to have a fresh start to be part of society with clean slate. - Absolute forgiveness or waiver by the government Tax condonation - Forgiveness of the tax obligation of a certain taxpayer under certain justifiable grounds. - Also referred to tax remission TAX AMNESTY Covers both civil and criminal liabilities Operates retrospectively by forgiving past violations Conditional upon the taxpayer paying the government a portion of the tax TAX CONDONATION Covers only civil liabilities Applies prospectively to any unpaid balance of the tax, hence, the portion already paid will not be refunded. Requires no payment CHAPTE5R 2: TAXES, TAX LAWS, AND TAX ADMINISTRATION TAXATION LAW - Refers to any law that arises from the exercise of taxation power of the State. Types of taxation laws 1. Tax laws – laws that provide for the assessment and collection of taxes. a. NIRC b. The Tariff and Customs Code c. The Local Tax Code d. The Real Property Tax Code 2. Tax exemption laws – laws that grant certain immunity from taxation a. Minimum Wage Law b. The Omnibus Investment Code of 1987 (E.O 226) c. Barangay Micro-Business Enterprise (BMBE) Law d. Cooperative Development Act Sources of Taxation 1. Constitution 2. Statutes and Presidential Decrees 3. Judicial Decisions or Case Laws 4. Executive Orders and Batas Pambansa 5. Administrative Issuances 6. Local Ordinances 7. Tax Treaties and Conventions with foreign countries 8. Revenue Regulations Types of Administrative Issuances 1. Revenue Regulations - These are issuances signed by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue (CIR) that specify, prescribe, or define rules and regulations for the effective enforcement of provisions of the NIRC and related Statues. - It is a formal pronouncements intended to clarify or explain the law - It has the force and effect of law, but it is intended to expand or limit the application of the law, otherwise, it is void. 2. Revenue Memorandum Orders - Issuances that provide directives instructions, prescribe guidelines, and outline processes, operations, activities workflows, methods and procedures necessary for the implementations of policies, goals, objectives, plans and programs of the Bureau in all areas of operation except auditing. 3. Revenue Memorandum Rulings - Ruling, opinions and interpretations of the CIR with respect to the provision of the CIR and other tax laws. - BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ad initio. 4. Revenue Memorandum Circulars - Issuances that publish pertinent applicable portions as well as amplifications of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. 5. Revenue Bulletins (RB) - Refer to periodic issuances, notices and official announcements of the CIR that consolidate the BIR position on specific issues of law or administration in relation to the provision of tax code and other issuances of guidelines of the public. 6. BIR rulings - Official positions of Bureau to queries raised by the taxpayers and other stakeholders relative to clarification and interpretation of tax laws. - Rulings are mere advisory or sort of information that may be reversed by the BIR at any time. - Types of rulings a. VAT rulings b. International Tax Affairs Division (ITAD) rulings c. BIR rulings d. Delegated Authority (DA) rulings GAAP VS TAX LAWS GAAP TAX LAWS These are Includes rules, regulations not laws but and rulings prescribe the mere criteria for tax reporting. a conventions special form of financial of financial reporting intended to meet reporting specific needs of tax authorities. Taxpayers follow GAAP in recording transactions while for preparation and filling of tax returns, taxpayers are mandated to follow tax law. Nature of Philippine Tax Laws - Tax laws are civil and not political in nature. - Internal revenue laws are not penal in nature because they do not define crime. Penalty provisions are merely intended to secure taxpayers’ compliance. Tax – is an enforced proportional contribution levied by the lawmaking body of the Philippine State to raise revenue for public purpose. Elements of a Valid Tax 1. Must be levied by the taxing power having jurisdiction over the object taxation. 2. Must not violate Constitutional and inherent limitations. 3. Must be uniform and equitable. 4. Must be for public purpose. 5. Must be proportional in character. 6. Generally payable in money CLASSIFICATION OF TAXES 1. As to purpose a. Fiscal or revenue tax – imposed for general purpose b. Regulatory – imposed to regulate business, conduct, acts, or transactions c. Sumptuary – tax levied to achieve some social or economic objective 2. As to subject matter a. Personal, poll or capitation – tax on persons who are resident of a particular territory b. Property tax – tax on properties, real or personal c. Excise or privilege tax – imposed upon the performance of an act, enjoyment of a privilege or engagement in an occupation 3. As to incidence a. Direct tax – both impact and incidence of taxation rest upon the same taxpayer. = tax is collected from the person who is intended to pay the same. = statutory taxpayer is the economic taxpayer b. Indirect tax – paid by any person other than the one who is intended to pay the same. = Statutory taxpayer is not the economic taxpayer Note: Statutory taxpayer is the person named by law to pay while the economic taxpayer is the one who actually pays. 4. As to amount a. Specific tax – imposed on a per unit basis (kilo, liter, meter) b. Ad valorem – imposed upon the value of the tax of the object 5. As to rate a. Proportional tax – flat or fixed rate tax. = subjects all taxpayers with the same rate without regard to their ability to pay. b. Progressive or graduated tax – increasing rates as the tax base increases. = it is an equitable taxation that lessening the gap between rich and poor. c. Regressive tax – decreasing tax rate as the tax base decrease. = regarded as anti-poor = directly violates the Constitutional guarantee of progressive taxation d. Mixed tax – manifest tax rates which are combination of any of the above types of tax. 6. As to imposing authority a. national tax – imposed by the national government a.1 income tax – income, profits a.2 estate tax – gratuitous transfer of properties by a decedent upon death a.3. Donor’s tax - gratuitous transfer of properties by a living donor. a.4. VAT – collected by VAT business taxpayers a.5. Other percentage tax – collected by non-VAT business taxpayers a.6. Excise Tax – tax on sin products and non-essential commodities. (Alcohol, cigarettes, metallic minerals) a.7. Documentary Stamp tax – tax on documents, instruments, assignment, sale or transfer, right or property b. Local tax - imposed by the municipal or local government Examples: Real Property Tax, Professional Tax, Business taxes, fees and charges, community tax, tax on banks and other financial institutions DISTINCTION OF TAXES WITH SIMILAR ITEMS Tax vs revenue TAX Refers to amount imposed by the government for public purpose Tax vs license fee TAX Emanates from taxation power and imposed upon any object. Imposed after commencement of business Post-activity imposition REVENUE Refers to all income collections of the government LICENSE FEE Emanates from police power and is imposed to regulate the exercise of privilege Imposed before engagement in those activities Pre-activity imposition Tax vs toll TAX Levy of government, hence, it is a demand of sovereignty Depends upon the needs of the government Private entities cannot imposed tax Tax vs debt TAX Arises from law Non-payment leads to imprisonment Cannot be subject to set-off generally payable in money draws interest when taxpayer is delinquent TOLL Charge for the use of other’s property, hence, demand of ownership Depend upon the value of the property leased Imposed by both government and private entities DEBT Arises from private contracts Non-payment does not lead to imprisonment Can be subject to set-off can be paid in kind (dacion en pago) Draws interest when it is stipulated or when debtor incur legal delay Tax vs special assessment TAX SPECIAL ASSESSMENT Imposed upon Levied by the persons, properties government on or privileges lands adjacent to public improvement Levied without Basis is the benefit expectation of a in terms of direct proximate appreciation in land benefit value caused by improvement Non-payment will Non-payment will result to not result to imprisonment imprisonment Tax vs tariff TAX Imposed upon persons, privileges, transaction or properties Tax vs penalty TAX Imposed for the support of government Arises from law TARIFF Imposed on imported or exported commodities PENALTY Imposed to discouraged an act Arises from law or contract TAX SYSTEM - refers to method or schemes of imposing, assessing and collecting taxes. - Includes all tax laws and regulations, means of enforcement, government office, bureau, withholding agents. - Philippine tax system is divided into two: a. National tax system b. Local tax system Types of tax system according to imposition 1. Progressive – employed in the taxation income of individuals and certain local business 2. Proportional – employed in taxation of corporate income and business 3. Regressive – not employed in the Philippines Types of tax system according to impact 1. Progressive system – emphasizes direct taxes (cannot be shifted). = impacts more upon the rich 2. Regressive system – emphasizes indirect taxes (shifted by business to consumers) = impact rest upon the bottom end of the society. Hence, it is anti-poor. Note: it is widely believed that despite the Constitutional guarantee of a progressive taxation, the Philippines has dominantly regressive tax system due to the prevalence of business taxes. TAX COLLECTION SYSTEMS 1. Withholding system on income tax a. Creditable withholding tax – the payor of the income withholds or deducts the tax on he income before releasing the same to the payee and remits the same to the government. - intended to support the selfassessment method to lessen the burden of lump sum tax payment of taxpayers and also provides for a third-party check of the BIR for non-complaint taxpayers. - the following are the withholding taxes collected under this system a.1. withholding tax on compensation – estimated required tax by the government to be withheld by employers against the income of employees a.2. expanded withholding tax estimated required tax by the government to be deducted on certain income payments made by the taxpayers engaged in business. b. Final Withholding tax – a system of collection wherein payors are required to deduct the full tax on certain income payments. = intended for the collection of taxes from income with high risk of non-compliance Similarities of final and creditable withholding tax a. Payor withholds a fraction of the income and remit the same to the government b. By collecting at the moment cash is available, both serve to minimize cash flow problems to the taxpayer and collection problems to the government. Differences of final and creditable FINAL CREDITABLE Income tax Full Only a portion withheld Coverage of withholding Who remits the actual tax Necessity of income tax return for taxpayer Certain passive income Income payor Not required Certain passive and active income Income payor for the CWT and the taxpayer for the balance required 2. Withholding system on business tax – when the national government agencies including GOCCs purchased goods or services from private supplies, the law requires withholding of the relevant business tax, that is VAT or percentage tax. 3. Voluntary Compliance System – taxpayer himself determine his income, report the same through income tax returns and pays for the tax to the government. - this is also referred as “selfassessment method” - tax due determined under this system will be reduced by: a. withholding tax on compensation withheld by employers b. expanded withholding taxes withheld by suppliers of goods and services. - The taxpayer shall pay to the government the tax balance after the withheld tax. 4. Assessment or enforcement system – under this collection system, the government identifies non-compliant taxpayers, assess their tax dues including penalties. - Then, the government demands for taxpayer’s voluntary compliance or enforces collections by coercive means (summary or judicial proceeding) PRINCIPLES OF A SOUND TAX SYSTEM 1. Fiscal adequacy – requires that the sources of government funds must be sufficient to cover government costs = government must not incur deficit as it will be paralyzed. = hence, taxes should increase when government spending increases 2. Theoretical justice – suggest that taxation should consider the taxpayer’s ability to pay. = suggest that the exercise of taxation should not be oppressive, unjust, or confiscatory. 3. Administrative feasibility – suggest that tax laws should be capable of efficient and effective administration to encourage compliance. = government should make it easy for taxpayer to comply. = the following are the application of the principle of administrative feasibility a. E-filling and e-payment of taxes b. Substituted filling system for employees c. Final withholding tax on non-resident aliens or corporations d. Accreditation of authorized agent banks for the filling and payment of taxes TAX ADMINISTRATION - Refers to the management of tax system =. - Tax administration of the national tax system is entrusted with the BIR which is under the Department of Finance. Chief officials of the BIR 1. 1 commissioner 2. 4 deputy commissioner, each to be designated on the following a. Operations group b. Legal enforcement group c. Information systems group d. Resource management group Powers of BIR 1. Assessment and collection of taxes 2. Enforcement of all forfeitures, penalties and fines, and judgements in all cases decided in its favor by the courts. 3. Giving effect to and administering the supervisory and police powers conferred to it by the NIRC and other laws 4. Assignment of internal revenue officers and other employees to other duties 5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials 6. Issuance of receipts and clearance 7. Submission of annual report, pertinent information to Congress and reports to the Congressional Oversight Committee in matters of taxation Powers of the CIR (For complete information read page 44) 1. To interpret the provision of the NIRC, subject to review by the Secretary of Finance. 2. To decide cases, subject to the exclusive appellate jurisdiction of the court of tax appeals 3. To obtain information and to summon, examine and take testimony of persons to effect tax collection. 4. To make assessment and prescribe additional requirement for tax administration and enforcement. 5. To examine tax returns and determine tax due. 6. To conduct inventory taking or surveillance. 7. To prescribe presumptive gross sales and receipts for a taxpayer when a. The taxpayer failed to issue receipts; or b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration in the return.
