Chapter 1: Introduction to Taxation - - - Taxation is a state power, a legislative process, and a mode of government cost distribution. Government is needed by the people, yet government cannot exist without funding, the necessity of it is called theory of taxation The basis of taxation: The receipt of benefits reaped due to taxation is presumed, thus taxpayers can’t avoid payment. Direct receipt or availing of services is not a precondition of taxation. There are 2 types of cost allocation: (1)Benefit received theory and (2) Ability to pay theory Lifeblood Doctrine: ● Taxes are the lifeblood of the government, their prompt and certain availability is an imperious need. ● It is essential and indispensable to the continued subsistence of the government. ● Without taxes, the government would be paralyzed. ● It is imposed even in the absence of a constitutional grant, government has the right to choose the object of taxation, its exemptions are construed against the taxpayers, and the courts are not allowed to interfere with the collection of taxes. ● In income taxation: advance income is taxable upon receipt, deductions for capital expenditures and prepayments are not allowed, a lower deduction amount is preferred, and higher tax based is preferred. The (3) Inherent Power of the State is: Taxation Power, Police Power, and Eminent Domain. The scope of taxation is comprehensive, plenary, unlimited and supreme. The government can only demand tax obligations upon its subjects or residents within its territorial jurisdiction. - - - - - - The taxpayers have two obligations: (1) Filing of returns and payment of taxes and (2) Withholding of taxes on expenses and their remittance to the government. The government can tax resident citizens (RC) and domestic corporations (DC) for income derived from within and outside the country. In transfer taxation, RC, non-resident citizens (NRC), and resident aliens (RA) are taxable on transfers of properties located within or outside the country. International comity or mutual courtesy means that governments don’t tax income and properties of other governments and they give priority to treaty obligations over domestic law. The government does not tax itself, except: income for GOCC’s and properties and activities conducted for profit. Legislative taxing power is vested exclusively in Congress and cannot be delegated, except when: ● Local government to enable them to exercise fiscal autonomy. ● President is empowered to fix the amount of tariffs ● Other cases that require expedient and effective administration and implementation. No one should be deprived of life, liberty, or property without due process, tax laws should neither be harsh nor oppressive. In a substantive due process, tax is imposed only for public purpose under valid law by the taxing power of the jurisdiction. In a procedural due process, government shall observe the taxpayer’s right to notice and hearing. Assessments shall be made within 3 years from due date or filing of return (whichever is later). Collection shall be made 5 years from date of assessment. Taxation shall be uniform and equitable, this is the Uniformity rule in taxation. They shall be classified according to commonality in attributes and based on substantial distinction. Congress shall evolve a progressive system of taxation. In a Progressive system of taxation, tax rates increase as tax base increases. No one shall be imprisoned because of his poverty, no one shall be imprisoned for his mere inability to pay debt in good faith (if in bad faith, constitutes as estafa). Tax is from law, debt is private contracts. Tax comprises of public interest while debt comprises of private interest. Non-payment of tax is similar to crime except for poll (basic community) tax Tax exemptions granted under contract by the government should be honored. The government exercises free worship rule and does not subject the properties and revenues of religious institutions to taxation. There is also exemptions for revenues and assets by non-profit, non-stock educational institutions including grants, endowments, donations, or - - - - - - contributions for educational purposes actually, directly, and exclusively used for said purposes. When it comes to exemptions: for approval it needs absolute majority of the members of congress for withdrawal it needs relative majority, Delegation may be made on matters involving the expedient and effective administration and implementation of assessment and collection of taxes. It also includes the non-legislative characteristics of taxation. All cases involving taxes can be raised up to the Supreme Court of the Philippines. Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. There are 2 stages of the exercise of taxation power: (1) Levy or Imposition and (2) Assessment and collection. Situs is the place of taxation, the jurisdiction that has the power to levy taxes upon tax subjects. It serves as frame of reference as to whether the tax object is within or outside of tax jurisdictions. ● Business Tax Situs - where business is conducted ● Income Tax Situs (Service) - where they are rendered. ● Income Tax Situs (Sale) - place of sale ● Property Tax Situs - on their location. ● Personal Tax Situs - in their place of residence. Marshall Doctrine - “The power to tax involves the power to destroy” ex. Excessive tax on cigarettes. Holme’s Doctrine - “Taxation power is not the power to destroy while the court sits” ex. Creation of Ecozones with tax holidays and provision of incentives. Other doctrines in taxation: (3)Prospectivity of tax laws, (4)Non-compensation or set off, (5)non-assignment of taxes, (6)Imprescriptibility in taxation, (7)doctrine of estoppel, (8)Judicial non-interference, and (9)strict construction of tax laws. Double taxation is when the same taxpayer is taxed twice for the same tax object. Primary element is that its the same tax object, secondary elements are: type, purpose, jurisdiction, and period. There are 2 types of double taxation: (1) Direct Double Taxation and (2) Indirect Double Taxation. Double taxation can be minimized by: (1) Provision of tax exemption, (2) allowing foreign tax credit, (3) allowing reciprocal tax treatment, and (4) entering into treaties or bilateral agreements. Escapes from taxation are means that are available to the taxpayer to limit or avoid the impact of taxation. Those that result to loss in government revenue are: (1) Tax evasion, (2) Tax Avoidance and (3)Tax exemption. - Those that do not result to loss: (1) Shifting [Forward, Backward, and Onward], (2) Capitalization, and (3) Transformation. Tax Amnesty Tax Condonation General pardon for erring taxpayers, an absolute forgiveness. Forgiveness of the tax obligation under certain justifiable grounds. Government > Taxpayers Covers civil and criminal liability Covers civil liability of taxpayer Retrospective; forgives past violations Prospective; unpaid balance of tax (proportion already paid is not refunded) Conditional upon the taxpayer paying the government a portion of tax. No payment needed. Chapter 2: Taxes, Tax Laws, and Tax Administration - Taxation law is any law that arises from the exercise of taxation power. Tax laws are one that provide for the assessment and collection of taxes. Tax exemption laws grant certain immunity from taxation. Sources of Taxation Laws Types of Administrative Issuances Constitution Revenue Regulations Statutes and Presidential Decrees Revenue memorandum orders Judicial Decision or Case Laws Revenue memorandum rulings Executive Orders and Batas Pambansa Revenue memorandum circulars Administrative Issuances Revenue bulletins Local Ordinances BIR rulings Tax Treaties and Conventions with foreign countries Revenue Regulations - GAAP are not laws, they are merely benchmarks for general purpose financial reporting, it is meant to meet the common needs of the users of general public. Tax reporting is a special form of financial reporting which is intended to meet specific needs of tax authorities. When preparing and filing of tax returns, taxpayers are mandated to follow the tax law in cases of conflict with GAAP. Tax laws are civil and not political, they are effective even during periods of enemy occupation. Internal revenue laws are not penal in nature and are merely intended to secure taxpayer’s compliance. Tax is enforced proportional contribution levied by the lawmaking body of the state to raise revenue for public purposes. It must be levied by the taxing power having jurisdiction, not violate the constitutional and inherent limitations, uniform and equitable, for public purpose, and generally payable in money. Classification of Taxes - - - As to purpose 1. Fiscal or revenue tax - for gen. Purposes 2. Regulatory - to regulate business, conduct, acts or transactions 3. Excise or privilege tax - imposed on the performance of enjoyment of a privilege. As to incidence a. Direct tax - both impact and incidence rest on the same taxpayer. Collected from the person who is intended to pay the same. b. Indirect tax - paid by the person other than the one intended to pay. Ex. business tax As to amount a. Specific tax - fixed on a per unit basis b. Ad valorem - imposed upon value of tax object As to rate 1. Proportional tax - flat or fixed rate 2. Progressive tax - increasing rates as tax base increase 3. Regressive tax - decrease tax rates as tax base increases. 4. Mixed tax - combination of above. As to imposing authority 1. National tax - imposed by national government 2. Local tax - imposed by municipal or local government. Tax vs. Revenue, the amount imposed is tax but the amount collected is revenue. Tax vs. License Fee, Tax comes from taxation power it is a post-activity imposition, License Fee comes from police power and is a pre-activity imposition. Tax vs. Toll, Tax is a demand of sovereignty, Toll is a demand of ownership. Both government and private entities can impose toll, but private entities cannot impose tax. Tax vs. Debt, tax arises from law, debt comes from private contracts. Tax vs. Special Assessment. Tax is the amount imposed upon tax objects, Special Assessment is levied by the government on lands adjacent to a public improvement. Intended to compensate the government for a part of the cost of the improvement. Tax vs. Tariff. Tax is broader than tariff, it is the amount imposed on tax objects. Tariff is the amount imposed on imported or exported commodities. Tax vs. Penalty. Tax is the amount imposed to support the government. Penalty is amount imposed to discourage an act. Tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. There are two imposed in the Philippines: (1) National Tax System and (2) Local tax law. - - - - - There are 3 types of tax system according to Imposition: (1) Progressive, (2) Proportional, and (3) Regressive. There are 2 types of tax system according to Impact: (1)Progressive system and (2) Regressive System. Withholding system on income tax deducts the tax on the income before releasing the same to the payee and remits the same to the government 1. Creditable withholding tax a. Compensation - estimated tax required to be withhold by employers against compensation income. b. Expanded - estimated tax required to be deducted on certain income payments made by taxpayers engaged in business. - Supports the self-assessment method to lessen the burden of lump tax payment 2. Final withholding tax - 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. Withholding system on business tax when GOCC’s purchase goods or services from private suppliers, law required withholding of the relevant business tax. Voluntary compliance system is when the taxpayer himself determined his income, reports it, and pays the tax. Assessment or enforcement system is where government identifies non-compliant taxpayers and demands voluntary compliance or enforce collection. According to Adam Smith, government should adhere to the following Principles of a Sound Tax System: (1) Fiscal Adequacy, (2) Theoretical Justice, and (3) Administrative feasibility. Tax Administration is the management of the tax system. In the PH, it is entrusted to BIR which is under the supervision and administration of Dept. of Finance. Powers of BIR 1. Assessment and collection of tax 2. Enforcement of judgments decided in its favor by the court 3. Giving effect and administering police power conferred by NIRC 4. Assignment of internal revenue officers and other employees to duties 5. Provision and distribution of forms etc to proper officials 6. Issuance of receipts and clearances 7. Submission of annual report in matters of taxation to Congress Powers of CIR 1. Interpret the provision of the CIR 2. Decide tax cases 3. Obtain information and to summon, examine, and take testimony of persons effect tax collection. 4. Make adjustment and prescribe for tax administration and enforcement. 5. Examine tax return and determine tax due 6. Conduct inventory or surveillance 7. Prescribe presumptive gross sales and receipts 8. Terminate tax period when taxpayer is retiring, leaving the PH, and intending to remove, hide, or conceal property. 9. Prescribe real property value (zonal value) 10. Compromise tax liability of taxpayer 11. Inquire into bank deposits 12. Accredit and register tax agents 13. Refund or credit internal revenue taxes 14. Abate or cancel tax liabilities 15. Prescribe additional procedures or document requirement 16. Delegate his powers to subordinates with rank equivalent to division chief. Rules in assignments of revenue officers to other duties 1. Those assigned where excisable articles are kept in no more than 2 years 2. Those assigned to perform assessment and collection function are kept no more than 3 years 3. Those assigned to special duties shall not exceed 1 year Other Agencies tasked with tax collection or tax incentive related functions Bureau of Customs. Administers collection of tariffs on imported articles and collections of VAT on importation. Under supervision of Dept. of Finance. Board of Investments. Leads the promotion of investment in the Philippines. It supervises the grant of tax incentive under the Omnibus Investment Code. Philippine Economic Zone Authority. Promotes investments in export-oriented manufacturing industries in PH and supervises grant of both fiscal and non-fiscal incentives. Local Government Tax Collecting Unit. Provinces, municipalities, cities, and brgys also imposed and collect various local taxes, fees, and charges to rationalize their fiscal autonomy. Fiscal Incentives Review Board. Oversight function of the administration and grant of tax incentives by the Investment Promotion Agencies. It approves and disapproves grant of tax incentives to private entities. Taxpayers classfication for purposes of Tax Administration 1. Large Taxpayers - under supervision of Large Taxpayer Service (LTS) of the BIR National Office. Criteria: a. As to payment: 1. VAT = 200k per quarter of preceding year 2. Excise Tax - 1M tax paid for preceding year 3. Income Tax = 1M annual income tax paid 4. Withholding tax = 1m annual withholding tax 5. Percentage Tax = 200k paid or payable per quarter 6. Documentary tax stamp = 1m aggregate amount per year b. As to financial conditions and results of operations: 1. Gross receipts or sale = 1B annual 2. Net worth = 300M net worth at end of year 3. Gross purchases = 800M total annual purchases 4. Top corporate taxpayer listed and published by SEC. Automatic classification as Large taxpayer: 1. All branched of taxpayer under LTS 2. Subsidiaries, affiliates, and entities under LT 3. Surviving company in merger or consolidation 4. Corporation that absorbs the operation or business 5. Corporation with authorization of 300M registered with SEC 6. Multinational corporation + no.5 7. Publicly listed corporations 8. Universal, commercial, and foreign banks 9. Corporate taxpayer with 100M in BITUPTA 10. Corporate taxpayer in production of metallic materials. 2. Non-large Taxpayer - under supervision of respective Regional District Office. Chapter 3: Introduction to Income Taxation - - Income is regarded as the best measure of taxpayer’s ability to pay tax. Gross income means taxable income, it refers to certain items of gross income less deductions and personal exemptions allowable by law. It is any income that can be subject to income tax. It is any inflow of wealth to the taxpayer from whatever source that increases the net worth. Elements of Gross income are: (1) return on capital that increases net worth, (2) realized benefit, and (3) not exempted by law, contract, or treaty. Capital means any wealth or property, return on capital that increases net worth is subject to tax. Illustration: Selling Price xxx Cost (xxx) Mark-up(Gross Income) xxx -> subject to tax - - - - Items that have infinite value and are incapable of pecuniary (money) value, wherein anything received as compensation for their loss is deemed return of capital are: Life, Health, and Human Reputation. Loss of capital decrease net worth, while loss of profit does not. Recovery of loss of capital maintains your net worth, while recovery of lost profit increases it, hence it is a return of capital. Recovery of lost profit through insurance, indemnity contracts, or legal suits constitutes a taxable return on capital. Benefit is any form of advantage derived by the taxpayer. There is benefit when there is an increase in net worth, it occurs when one receives income, donation, or inheritance. The following are not benefits, hence not taxable: (a) Receipt of a Loan, (b) Discovery of lost property, and ( C) Receipt of money. The “realized” concept requires that there is a degree of undertaking or sacrifice from the taxpayer to be entitled to the benefit. There are 3 requisites: (1) there must be exchange, (2) transaction involves another entity, and (3) it increaes the net worth of the recipient. The Types of transfers are: 1. Bilateral transfers like a (1) Sale or (2) Barter, often referred as “onerous transactions”, the cost of fulfillment overweighs the benefit received. They are “earned or realized” hence they are subject to income tax. - - - - 2. Unilateral transfers like (1) Succession or (2) donation, often referred to as “gratuitous transactions”. There is an absence of the earning process, hence it is subject to transfer tax. 3. Complex transactions are partly gratuitous and onerous referred to as “transfers for less than full and adequate consideration”. The gratuity portion is subject to transfer tax and the onerous portion to income tax. An entity is every person, natural or juridical, it may be a taxable or exempt from tax. A taxable item of gross income arises from transactions which involves another entity. The increase of wealth in the form of appreciation or decrease in properties and obligations, in the absence of sale and barter, is not taxable but unrealized gains. Income received in non-cash considerations is taxable at the fair value of the property received. Taxable items of income may be realized by the taxpayer in 2 ways: (1) Actual receipt and (2) Constructive receipt. Inflow of wealth that does not increase his net worth is not income due to absence of benefit. Ex. Receipt of property in trust; borrowing of money under obligation to return. Items of gross income are not exempt from constitution, law, contracts or treaties from taxation. Types of Income Taxpayers a. Individuals 1. Citizens a. Resident b. Non-resident 2. Aliens a. Resident b. Non-resident i. Engaged in trade or business ii. Not engaged in trade or business 3. Corporations a. Domestic corporations b. Foreign Corporations i. Resident Foreign ii. Non-resident Foreign - - - The intention of taxpayer regarding the nature of his stay within or outside of the PH shall determine his appropriate residency classification In default of intention, length of stay shall be the determining factor. Estates are properties, rights, and obligations of a deceased person not extinguished by his death. Can be in judicial settlement or extrajudicial settlement. Trusts is an arrangement where one person transfers property to another person, managed by a third party. One that is irrevocable is treated as an individual taxpayer, one that is revocable are not taxable entities, and income from property is taxed to the grantor. When silent, it shall be presumed revocable. Domestic corporations are organized in accordance to PH laws. Foreign Corporations are one organized under foreign law and has two types: (1) Resident Foreign Corporation and (2) Non-resident foreign corporation. Special Corporations are domestic or foreign subject to special tax rules are preferential tax rates. Taxpayers who are both residents and citizens are taxable on all income from sources within and without the PH. The rules on extraterritorial taxation on resident citizens exposes them to double taxation, however the NIRC allows a tax credit for taxes paid in foreign countries. Situs is important in determining whether or not an income is taxable in the Philippines. INCOME SITUS RULES Types of Income Place of taxation Interest income Debtor’s residence Royalties Where the intangible is employed Rent Income Location of property Service Income Place where service is rendered. OTHER INCOME SITUS RULES a. Gain on sale of properties i. Personal Property ● Domestic Securities - presumed earned in the PH ● Other personal property - earned where property is sold. ii. Real Property - earned where property is located. b. Dividend Income i. Domestic corporation - presumed earned within ii. Foreign corporation - situs depends on pre-dominance test c. Merchandising income - earned where property is sold d. Manufacturing Income Production Distribution Remark Within Within Total income is earned within PH Without Without Total income is earned without PH Within Without Production within, Distribution Without Without Within Distribution within, Production without
