Chapter 2 CHAPTER 2: TAXES, TAX LAWS, AND TAX ADMINISTRATION PDF

Preview

Summary

Download Chapter 2 CHAPTER 2: TAXES, TAX LAWS, AND TAX ADMINISTRATION PDF

Description

CHAPTER 2: TAXES, TAX LAWS, AND TAX ADMINISTRATION TAXATION LAW - law that arises from the exercise of the taxation power of the State. Types of taxation laws 1. Tax laws 2. Tax exemption laws Sources of Taxation Laws 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 - issuances signed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (CIR). Specify, prescribe, define rules and regulations for the effective enforcement of NIRC provision and the related statute. 2. Revenue memorandum orders - (RMOs) are issuances that provide directives or instructions; prescribe guidelines; and outline processes, operations, activities, workflows, methods, and procedures necessary in the implementation of stated policies, goals, objectives, plans, and programs of the Bureau in all areas of operations except auditing. 3. Revenue memorandum rulings - (RMRs) are rulings, opinions and interpretations of the CIR with respect to the provisions of the Tax Code and other tax laws as applied to a specific set of facts, with or without established precedents, and which the CIR may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. 4. Revenue memorandum circulars - (RMCs) are issuances that publish pertinent

and applicable portions as well as amplifications of laws, rules, regulations,and precedent issued by the BIR and other agencies/ offices. 5. Revenue bulletins - (RB) refer to periodic issuances, notices, and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue's position on certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the guidance of the public. 6. BIR rulings - are official positions of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws.*Rulings are merely advisory or a sort of information service to the taxpayer such that none of them is binding except to the addressee and may be reversed by the BIR at any time. Types of rulings 1. Value Added Tax (VAT) rulings 2. International Tax Affairs Division (ITAD) rulings 3. BIR rulings 4. Delegated Authority (DA) rulings Generally Accepted Accounting Principles (GAAP) vs. Tax Laws Generally accepted accounting principles or GAAP are not laws, but are mere conventions of financial reporting. Tax laws is intended to meet specific needs of tax authorities. *However, in the preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of conflict with GAAP. NATURE OF PHILIPPINE TAX LAWS - Civil,not political and penal. TAX- an enforced proportional contribution levied by the lawmaking body of the State to raise revenue for public purposes.

Elements of a Valid Tax 1. levied by the taxing power having jurisdiction over the object of taxation. 2. must not violate Constitutional and inherent limitations. 3. uniform and equitable. 4. for public purpose. 5. proportional in character. 6. generally payable in money. Classification of Taxes A. As to purpose 1. Fiscal or revenue tax - for general purpose 2. Regulatory - regulate business, conduct, acts, or transactions 3. Sumptuary - social or economic objectives B. As to subject matter 1. Personal, poll or capitation - on persons who are residents of a particular territory 2. Property tax - on properties, real or personal 3. Excise or privilege tax - upon the performance of an act, enjoyment of a privilege, or engagement in an occupation C. As to incidence 1. Direct tax - When both the impact and incidence of taxation rest upon the same taxpayer, The statutory taxpayer is the economic taxpayer. 2. Indirect tax - This occurs in the case of business taxes where the statutory taxpayer is not the economic taxpayer. *The statutory taxpayer is the person named by law to pay the tax. An economic taxpayer is the one who actually pays the tax. D. As to amount 1. Specific tax - fixed amount imposed on a per unit basis such as per kilo, liter or meter, etc. 2. Ad valorem - fixed proportion imposed upon the value of the tax object E. As to rate 1. Proportional tax - This is a flat or fixed rate tax. - same rate without regard to their ability to pay. 2. Progressive or graduated tax - increasing rates as the tax base increases. Equitable. 3. Regressive tax - decreasing tax rates as the tax base increases. Anti-poor and violates the Constitutional guarantee of progressive taxation. 4. Mixed tax - combination of any of the above types

of tax. F. As to imposing authority 1. National tax - tax imposed by the national government a. Income tax - tax on annual income, gains or profits b. Estate tax - tax on gratuitous transfer of properties by a decedent upon death c. Donor's tax - tax on gratuitous transfer of properties by a living donor d. "Value Added Tax - consumption tax collected by VAT business taxpayers e. Other percentage tax - consumption tax collected by non-VAT business taxpayers f. Excise tax - tax on sin products and non-essential commodities such as alcohol, cigarettes and metallic minerals. ● privilege tax which is also called excise tax. g. Documentary stamp papers - a tax on documents, instruments, loans agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. 2. Local tax - tax imposed by the municipal or local government Examples: a. Real property tax b. Professional tax c. Business taxes, fees, and charges d. Community tax e. Tax on banks and other financial institutions DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax Revenue - all income collections of the government which includes taxes, tariff, licenses, toll, penalties and others

-

amount imposed

improvement. It is imposed on land only and is intended to compensate the government for a part of the cost of the improvement.

Tax vs. Revenue -

Tax refers to the amount imposed by the government for public purpose. Revenue refers to all income collections of the government which includes taxes, tariff, licenses, toll, penalties and others.

Tax vs. License fee -

-

-

Tax emanates from taxation power and is imposed upon any object such as persons, properties, or privileges to raise revenue. License fee emanates from police power and is imposed to regulate the exercise of a privilege such as the commencement of a business or a profession. Tax is a post-activity imposition whereas license is a pre-activity imposition.

*Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of the land owner. Therefore, the non-payment of special assessment will not result in imprisonment of the owner (unlike in non-payment of taxes). Tax vs. Tariff -

Tax vs. Penalty -

Tax vs. Toll -

-

Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of other's property; hence, it is a demand of ownership. The amount of tax depends upon the needs of the government The amount of toll is dependent upon the value of the property leased.

*Both the government and private entities impose toll, but private entities cannot impose taxes. Tax vs. Debt -

Tax arises from law Non-payment of tax leads to imprisonment debt arises from private contracts. Non-payment of debt does not lead to imprisonment. Debt can be subject to set-off but tax is not. Debt can be paid in kind (dacion en pago) but tax is generally payable in money.

Tax vs. Special Assessment -

Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied by the government on lands adjacent to a public

Tax is an amount imposed upon persons, privilege, transactions, or properties. Tariff is the amount imposed on imported or exported commodities.

-

Tax is an amount imposed for the support of the government. Penalty is an amount imposed to discourage an act. Penalty may be imposed by both the government and private individuals. It may arise both from law or contract whereas tax arises from law.

TAX SYSTEM - methods or schemes of imposing, assessing, and collecting taxes. It includes all the tax laws and regulations, the means of their enforcement, and the government offices, bureaus and withholding agents which are part of the machineries of the government in tax collection. - The Philippine tax system is divided into two: the national tax system and the local tax system. Types of Tax Systems According to Imposition 1. Progressive - employed in the taxation of income of individuals, and certain local business taxes 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. A direct tax cannot be shifted. Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be efficient. This type of tax system impacts more upon the rich.

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.

2. Regressive system Differences between FWT and CWT -

emphasizes indirect taxes. Indirect taxes are shifted by businesses to consumers; hence, the impact of taxation rests upon the bottom end of the society. In effect, a regressive tax system is anti-poor.

*It is widely believed that despite the Constitutional guarantee of a progressive taxation, the Philippines has a dominantly regressive tax system due to the prevalence of business taxes. TAX COLLECTION SYSTEMS A. Withholding system on income tax - the payor of the income withholds or deducts the tax on the income before releasing the same to the payee and remits the same to the government. The following are the withholding taxes collected under this system: 1. Creditable withholding tax

B. Withholding system on business tax - when the national government agencies and instrumentalities including government-owned and controlled corporations (GOCCs) purchase goods or services from private suppliers, the law requires withholding of the relevant business tax (i.e. VAT or percentage tax). C. Voluntary compliance system - the taxpayer himself determines his income, reports the same through income tax returns and pays the tax to the government. This system is also referred to as the "Self-assessment method."

a. Withholding tax on compensation - an estimated tax required by the government to be withheld (i.e. deducted) by employers against the compensation income to their employees b. Expanded withholding tax - an estimated tax required by the government to be deducted on certain income payments made by taxpayers engaged in business

The 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 or services

*The creditable withholding tax is intended to support the self-assessment method to lessen the burden of lump sum tax payment of taxpayers and also provides for a possible third-party check for the BIR of non-compliant taxpayers.

D. Assessment or enforcement system - the government identifies non-compliant taxpayers, assesses their tax dues including penalties, demands for taxpayer's voluntary compliance or enforces collections by coercive means such as a summary proceeding or judicial proceedings when necessary.

2. Final withholding tax - a system of tax collection wherein payors are required to deduct the full tax on certain income payments Similarities of final tax and creditable withholding tax a. In both cases, the income payor withholds a

PRINCIPLES OF A SOUND TAX SYSTEM According to Adam Smith, governments should adhere to the following principles or canons to evolve a sound tax system: 1. Fiscal adequacy

-

The government must not incur a deficit. A budget deficit paralyzes the government's ability to deliver the essential public services to the people. Hence, taxes should increase in response to an increase in government spending.

2. Theoretical justice - suggests that taxation should consider the taxpayer's ability to pay. It also suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory. 3. Administrative feasibility - suggests that tax laws should be capable of efficient and effective administration to encourage compliance. Government should make it easy for the taxpayer to comply by avoiding administrative bottlenecks and reducing compliance costs. The following are applications of the principle of administrative feasibility: 1. E-filing and e-payment of taxes 2. Substituted filing system for employees 3. Final withholding tax on non-resident aliens or corporations 4. Accreditation of authorized agent banks for the filing and payment of taxes TAX ADMINISTRATION - refers to the management of the tax system. Tax administration of the national tax system in the Philippines is entrusted to the Bureau of Internal Revenue which is under the supervision and administration of the Department of Finance. Chief Officials of the Bureau of Internal Revenue 1. 1 Commissioner 2. 4 Deputy Commissioners, each to be designated to the following: a. Operations group b. Legal Information Enforcement c. Information Systems Group d. Resource Management Group POWERS OF THE BUREAU OF INTERNAL REVENUE 1. Assessment and collection of taxes 2. Enforcement of all forfeitures, penalties and fines,

and judgments in all case 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 clearances 7. Submission of annual report, pertinent information to Congress and reports to the Congressional Oversight Committee in matters of taxation POWERS OF THE COMMISSIONER OF INTERNAL REVENUE 1. To interpret the provisions of the NIRC, subject to review by the Secretary of Finance 2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals, such as: a. Disputed assessments b. Refunds of internal revenue taxes, fees, or other charges c. Penalties imposed d. Other NIRC and special law matters administered by the BIR 3. To obtain information and to summon, examine, and take testimony of persons to effect tax collection Purpose: For the CIR to ascertain: a. The correctness of any tax return or in making a return when none has elwon been made by the taxpayer b. The tax liability of any person for any internal revenue tax or in correcting any such liability c. Tax compliance of the taxpayer Authorized acts: a. To examine any book, paper, record or other data relevant to such inquiry b. To obtain on a regular basis any information from any person other than the person whose internal revenue tax liability is subject to audit c. To summon the person liable for tax or

required to file a return, his employees, or any person having possession and custody of his books of accounts and accounting records to produce such books, papers, records or other data and to give testimony d. To take testimony of the person concerned, under oath, as may be relevant or material to the inquiry e. To cause revenue officers and employees to make canvass of any revenue district

decedent b. To substantiate the taxpayer's claim of financial incapacity to pay tax in an application for tax compromise 12. To accredit and register tax agents 13. To refund or credit internal revenue taxes 14. To abate or cancel tax liabilities in certain cases

4. To make an assessment and prescribe additional requirement for tax administration and enforcement

15. To prescribe additional documentary requirements

5. To examine tax returns and determine tax due thereon

16. To delegate his powers to any subordinate officer with a rank equivalent to a division chief of an office

6. To conduct inventory taking or surveillance

Non-delegated power of the CIR

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.

The following powers of the Commissioner shall not be delegated:

8. To terminate tax period when the taxpayer is: a. Retiring from business b. Intending to leave the Philippines c. Intending to remove, hide, or conceal his property d. Intending to perform any act tending to obstruct the proceedings for the no collection of the tax or render the same ineffective 9. To prescribe real property values For purposes of internal revenue taxes, fair value of real property shall mean whichever is higher of:

procedures

or

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance. 2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of the Bureau. 3. The power to compromise or abate any tax liability Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the following: a. Assessments are issued by the regional offices involving basic deficiency tax of P500,000 or less, and b. Minor criminal violations discovered by regional and district officials Composition of the Regional Evaluation Board

a. Zonal value prescribed by the Commissioner b. Fair market value as shown in the schedule of market values of the Provincial and City Assessor's Office 10. To compromise tax liabilities of taxpayers 11. To inquire into bank deposits, only under the following instances: a. Determination of the gross estate of a

a. Regional Director as chairman b Assistant Regional Director c. Heads of the Legal, Assessment and Collection Division d. Revenue District Officer having jurisdiction over the taxpayer 4. The power to assign and reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

Rules in assignments of revenue officers to other duties

-

1. Revenue officers assigned to an establishment where excisable articles are kept shall in no case stay there for more than 2 years.

-

2. Revenue officers assigned to perform assessment and collection function shall not remain in the same assignment for more than 3 years. 3. Assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year. Agents and Deputies for Collection of National Internal Revenue Taxes The following are constituted agents for the collection of internal revenue taxes: 1. The Commissioner of Customs and his subordinates with respect to collection of national internal revenue taxes on imported goods. 2. The head of appropriate government offices and his subordinates with respect to the collection of energy tax. 3. Banks duly accredited by the Commissioner with respect to receipts of payments of internal revenue taxes authorized to be made thru banks. These are referred to as authorized government depository banks (AGDB). OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES REL...