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PART I GENERAL PRINCIPLES TAXATION power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions SCOPE OF TAXATION TAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme STAGES OF TAXATION: (LAP) 1. Levy 2. Assessment 3. Payment Basic Principles of a Sound Tax System 1. Fiscal Adequacy 2. Theoretical Justice 3. Administrative Feasibility INHERENT LIMITATIONS (SPING) 1) Situs or territoriality of taxation 2) Must be for a Public purpose Test is whether proceeds will be used for something which is the duty of the State to provide. Legislature is not required to adopt a policy of all or none. Incidental benefit to individual does not defeat exemption 3) International comity Property of a foreign State of government may not be taxed by another 4) Non-delegability of the taxing power Contemplates power to QuickTime and a TIFF (Uncompressed) decompressor determine kind, object, extent, are needed to see this picture. amount, coverage, and situs of tax; Distinguish from power to assess and collect Exemptions: (a) presidential taxing powers; (b) local governments 5) Exemptions of Government agencies Taking money from one pocket to the other Applies only to entities exercising government functions (acta jure imperii)
CONSTITUTIONAL LIMITATIONS A. Direct 1) Due process Should not be harsh, oppressive, or confiscatory (Substantive) By authority of valid law (Substantive) Must be for a public purpose (Substantive) Imposed within territorial jurisdiction (Substantive) No arbitrariness in assessment and collection (Procedural) Right to notice and hearing (Procedural) 2) Equal protection All persons subject to legislation shall be treated alike, under like circumstances and conditions both in privileges conferred and liabilities imposed. Power to tax includes power to classify provided: (a) Based on substantial distinction (b) Apply to present and future conditions (c) Germane to purpose of law (d) Apply equally to all members of the same class 3) Non-impairment clause Rules (a) When government is party to contract granting exemption cannot be withdrawn without violating nonimpairment clause (b) When exemption generally granted by law withdrawal does not violate (c) When exemption granted under a franchise may be revoked; Consti provides that franchise is subject to amendment, alteration, or repeal by Congress. 4) Must be uniform and equitable
Advisers: Atty. Serafin Salvador, Atty. Michael Dana Montero, Atty. Gaudencio Mendoza; Head: Julie Ann B. Domino, Juan J. P. Enriquez III; Understudies: Rachelle T. Sy, Aldwin Mendoza, Timothy John Batan
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Persons affected
TAX DISTINGUISHED FROM LICENSE FEE TAX Exercise of Taxing power Raise revenue Persons, property and privilege no limit LICENSE FEE Emanate from the police power of the State Regulation Right to exercise a privilege only necessary to carry out regulation
TAX DISTINGUISHED FROM POLICE POWER TAX Purpose Raise revenue POLICE POWER (in the form of a FEE) Exercise to promote public welfare through regulation Limited to the cost of regulation, issuance of license, or surveillance Contracts may be impaired
Amount
Amount of exaction
No limit
Superiority of contracts
Contracts may be impaired unless (a) government is party to contract granting exemption; or (b) involves franchise Taxes paid form part of the public funds
Distinction lies in the primary purpose: License fee if primary purpose is to regulate and the excess of the amount collected from the cost to carry out the regulation is minimal and incidental. Tax if primary purpose, or at least one of the real and substantial purposes is to raise revenue. If amount is too high for regulation, it would be a tax; unless imposed on non-useful occupations or businesses. Purpose of distinction: limitations and exemptions apply only to one and not to the other (ex. Exemption from taxation does not include exemption from fee)
TAX DISTINGUISHED FROM DEBT TAX Source Law; legal obligation Personal DEBT Based on contract Assignable
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TAX DISTNGUISHED FROM EMINENT DOMAIN TAX Raise revenue Payment of EMINENT DOMAIN The taking of property for public use Just compensation
Purpose
Compensation
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GENERAL RULE: Taxes cannot be the subject of compensation or set-off * A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government. Reasons: a) lifeblood theory b) taxes are not contractual obligation (absence of consent of taxpayer) c) taxpayer and government are not mutual debtors and creditors of each other EXCEPTIONS: 1) Both claims already became overdue and demandable as well as fully liquidated there must have already been an act of appropriation by the government (legislative) of funds for payment of the debt. 2) Tax overpayment (BIRs obligation to refund or set-off arises from time tax was paid) 3) If the case involves local government taxes TAX DISTINGUISHED ASSESSMENT TAX Imposed on Why imposed Purpose FROM SPECIAL
TAX DISTINGUISHED FROM CUSTOMS DUTY TAX Coverage Object More comprehensive than customs duty Persons, prop, etc CUSTOMS DUTY kind of tax goods imported or exported
DOCTRINE OF EQUITABLE RECOUPMENT 1) refund of a tax illegally or erroneously collected or overpaid by a taxpayer 2) such tax refund is barred by prescription 3) tax presently being assessed against a taxpayer 4) may be recouped or set-off against the tax barred by prescription not allowed in Philippines, reason - LIFE BLOOD CONCEPT OF DOUBLE TAXATION Kinds of Double Taxation A. DIRECT DUPLICATE taxing same person, property or right twice for the same purpose by the same taxing authority within the same jurisdiction or taxing district within the same taxable period and they must be of the same kind or character of tax B. INDIRECT DUPLICATE Exists if any of the elements for Direct taxation is not present No constitutional prohibition on double taxation. However, where there is direct duplicate taxation then there may be violation of the constitutional precepts of equal protection and uniformity in taxation.
persons, properties, etc. regardless of Public improvement public that benefits the land QuickTime and a improvement TIFF (Uncompressed) decompressor picture. Support are of needed to see this Contribution to cost government of public improvement Regular exaction Exceptional as to time and locality Necessity Benefits obtained
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PART II THE NATIONAL INTERNAL REVENUE CODE OF 1997 TITLE I. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE (BIR) POWERS AND DUTIES OF THE BIR (ACEEGA) 1) Assessment and Collection of national internal revenue: (a) taxes (b) fees (c) charges 2) Enforcement of all (a) forfeitures (b) fines and (c) penalties connected therewith 3) Execution of all judgments decided in BIRs favor by (a) the Court of Tax Appeals (CTA) and (b) the ordinary courts 4) Give effect to and Administer the supervisory and police powers conferred to it by NIRC or by other laws. (Sec. 2) Officials of the BIR 1) one chief - Commissioner of Internal Revenue (Commissioner) 2) four assistant chiefs - Deputy Commissioners (Sec. 3) *E.O. 430 (July 28, 1997) designates each of the 4 Deputy Commissioners to head the following functional groups: (a) Operations group (b) Legal Enforcement Group (c) Information Systems Group (d) Resource Management Group Powers of the Commissioner A. Power to interpret tax law and decide tax cases (Sec 4) 1) Interpret provisions of NIRC and other tax laws subject to review by the Secretary of Finance 2) Decide: (a) disputed assessments (b) refunds of internal revenue taxes, fees and charges (c) penalties imposed in relation thereto (d) other matters arising from NIRC or other Page 8 of 145
NATURE OF TAX AMNESTY 1) general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law 2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3) to give tax evaders, who wish to relent & are willing to reform a chance to do so RULES ON TAX AMNESTY 1) Tax amnesty (a) like tax exemption, never favored nor presumed (b) construed strictly against the taxpayer (must show complete compliance with the law) 2) Government not estopped from questioning the tax liability even if amnesty tax payments were already received QuickTime and a TIFF (Uncompressed) decompressor Reason: Erroneous application and are needed to see this picture. enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents. Basis: Lifeblood Theory 3) Defense of Tax amnesty, like insanity, is a personal defense. Reason: Relates to the circumstances of a
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The taxpayers application for compromise shall not be considered unless he waives in writing his privilege under RA 1405 and other general or special laws. Such waiver shall authorize the Commissioner to inquire into his bank deposits. 7) Authority to Register tax agents (a) The Commissioner shall Accredit and Register, individuals and general professional partnerships and their rep. who prepare and file tax returns and other papers or who appear before the BIR (b) The Commissioner shall create national and regional accreditation boards Those who are denied accreditation may appeal the same to the Sec. of Finance who shall rule on the appeal within 60 days from receipt of such appeal. Failure of the Sec. of Finance to rule on the appeal within the said period shall be deemed as approval for accreditation. 8) Authority to Prescribe Additional RequirementsThe Commissioner may prescribe the manner of compliance with any documentary or procedural requirement for the submission or preparation of financial statements accompanying tax returns. D. Authority to delegate power (Sec. 7) The Commissioner may delegate the powers vested in him to subordinate officials with rank equivalent to Division Chief or higher, subject to limitations/restrictions imposed under the rules and regulations EXCEPT, (the following powers shall NOT be delegated): (RIR CoA A) 1) power to Recommend the promulgation of rules and regulations by the Sec. of Finance 2) power to Issue rulings of first impression or to Reverse, revoke, modify any existing rule of the BIR 3) power to Compromise or Abate any tax liability EXCEPT, the regional evaluation board may compromise: (a) assessments issued by regional offices involving deficiency taxes of P500,000 or less; and (b) minor criminal violations as may be Page 10 of 145
Regional Evaluation Board is composed of: i. Regional Director as Chairman ii. Asst. Regional Director iii. Heads of the Legal, Assessment and Collection Div. iv. Revenue District Officer having jurisdiction over the taxpayer 4) power to Assign or reassign internal revenue officers to establishments where articles subject to excise tax are kept
E. Assignment of Internal Revenue Officers (Secs. 16 &17) The Commissioner may assign/ reassign internal revenue officers: 1) involved in excise tax functions as often as the exigencies of revenue service may require; provided that he shall in no case stay in his assignment for more than 2 years (Sec. 16) 2) without change in rank and salary, to other or special duties connected with the enforcement and administration of internal revenue laws as the exigencies of the service may require; provided that officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than 3 years; assignment of officers and employees to special duties shall not exceed 1 year (Sec. 17) F. Internal Revenue Districts (Sec. 9) The Commissioner, with approval of the Sec. of Finance, shall divide the Philippines into such number of revenue districts for administrative purposes. Each district shall be under the supervision of a Revenue District Officer. Duties of the Commissioner: (PASO) 1) To Prescribe, provide and distribute to the proper QuickTime and a internal revenue officials the requisite licenses, TIFF (Uncompressed) decompressor needed to see this picture. stamps, labels, areall other forms, certificates, bonds, records, invoices, books, receipts, instruments and appliances used in administering laws falling within the jurisdiction of BIR 2) To Acknowledge payment of any tax under this Code expressing a) the amount paid and b) the particular account for which payment was made (Sec. 8)
TITLE II. TAX ON INCOME DEFINITION OF TERMS 1) Person an individual, a trust, estate or corp. 2) Corporation include partnerships (distinguish between ordinary and general professional partnership) 3) General professional partnership partnerships formed for the sole purpose of exercising their common profession, no part of its income being derived from engaging in any trade or business 4) Shares of stock includes shares of stock of a corp., warrants & options to purchase shares of stock, as well as units of participation in a partnership (except gen. professional partnership), joint stock companies, joint accounts, joint ventures taxable as corp., associations & recreation or amusement clubs & mutual fund certificates Page 11 of 145
Note:
Not recognized as income - when funds were merely entrusted/held money in trust (with obligation to return) to taxpayer because taxpayer acquires no control and does not receive economic benefit from it. Proceeds of embezzlement/swindling are income because embezzler/swindler already has complete dominion over them and can use such for his economic benefit. Increase in the value of property is not recognized as income; this only constitutes an unrealized increase which becomes taxable income only upon disposition and realization of gains. Same situation for stocks and stock dividends. Deposit with no interest does not produce income for the depositary; there is no flow of wealth. In a debt/loan situation it is important to determine whether there was an original intention to pay/consensual recognition of an obligation to repay. If yes, then the liability that QuickTime and a TIFF (Uncompressed) decompressor results just offsets the increase in are needed to see this picture. assets of the taxpayer borrower; therefore, no increase in net worth and no income derived from the debt/loan. If no (as in the case of a swindler/estafa), the proceeds will be considered as income and therefore taxable in the hands of the borrower swindler.
Nonresident Citizen Resident Alien Nonresident Alien engaged in trade or business Nonresident Alien not engaged in trade or business General Professional Partnership
(a) From a domestic corp. deemed income from within Phil. (b) From a foreign corp. deemed income from without provided more than 50% of the corp.s worldwide income is not derived from Phil. sources
Taxable Income
Income from sale of personal property derived from sources partly within and partly without the Phils. Domestic Corporation Gain from sale of personal property produced in whole or in part in one country and sold in another country, where one of the countries is the Philippines is income derived from sources partly within and partly outside the Philippines. Gains from the purchase of personal property within and sold without the Philippines or the purchase of personal property without and and itsa sale within the QuickTime TIFF (Uncompressed) decompressor Philippines shall be treated asthis derived entirely from are needed to see picture. sources within the country in which it was sold. Taxable Income Taxable Income Gross Income
*Taxable Income = Gross income (less) Deductions (less) Personal and additional exemptions *Gross Income = all income derived from whatever source TYPES OF INCOME TAXATION UNDER THE NIRC 1) Net Income Tax/Taxable Income (GI Deductions Exemptions) 2) Gross Income Tax (All income from whatever source) 3) Final Income Tax (On passive income and capital Page 13 of 145
TYPES OF TAXPAYERS A. Individuals Kinds of Individuals 1) Resident Citizen 2) Nonresident Citizen = citizen of the Philippines who: (a) Establishes the fact of his physical presence abroad with a definite intention to reside therein (b) Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis (c) Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i.e. not less than 183 days) during the taxable year (d) Previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines 3) Resident Alien 4) Nonresident Alien a) Those engaged in trade or business in the Philippines who come and stay in the Philippines for an aggregate period of more than 180 days during any calendar year b) Those not engaged in trade or business in the Philippines, which include nonresident aliens whose stay in the and a Philippines is QuickTime 180 days or less TIFF (Uncompressed) decompressor are needed to see this c) Aliens employed bypicture. regional or area headquarters and regional operating headquarters of multinational companies in the Philippines d) Aliens employed by offshore banking units e) Aliens employed by petroleum contractors and subcontractors
B. Optional Gross Income Taxation Effective Jan. 1, 2000: the President (upon recommendation of the Sec of Finance) may allow corporation an option to be taxed at 15% of gross income after the ff. conditions are satisfied: Tax effort ratio Ratio of IT collection to total tax revenue VAT tax effort Ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP Ratio of Cost of Sales to Gross Sales from all sources 20% of GNP 40% 4% of GNP 0.9%
The election of the option shall be irrevocable for 3 consecutive taxable years during which the corp. is qualified under the scheme Gross Income = Gross Sales ( - ) Sales returns, discounts and allowances ( - ) Cost of goods sold
Cost of Goods Sold Trading and Merchandising Concern Invoice cost plus import duties and freight in transporting goods to the place where actually sold, including insurance while in transit Manufacturing concern Cost of production of finished goods (raw materials, direct labor and manufacturing overhead, freight cost, insurance premiums, and other costs to bring the raw materials to the factory) If taxpayer is engaged in sale of service: Gross Income = Gross receipts ( - ) Sales returns, allowances and discounts C. Special Types of Domestic Corporations Proprietary educational institutions and hospital which are 10% On related trade, business or activity; 35% (2006) if total gross income from
On taxable income from all sources within and without the Philippines
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D. Rule for Corporations Exempt from Taxation General Rule: those enumerated under section 30 are exempt. Exception: exempted corporations are subject to income tax on their income from any of their properties, real or personal, or from any activities conducted for profit regardless of the disposition made of such income. Ex. Non-stock, non-profit religious organization is exempt from 35% ordinary income tax on corporations (by virtue of section 30 which uses as such) and from all property tax (by virtue of Constitution, provided ADE use for its religious purpose). However, if it derives income from its property or conducts an activity that is for profit (even if the proceeds will be used for the religious purpose), the proceeds will be taxable. Ex. For educational institutions, the proceeds, to be exempt, must be both a) realized from educational activities and b) used for educational activities.
GOCC, Agencies and Intrumentalities, including PAGCOR GSIS/ SSS / PHIC / PCSO Depository Banks
On interest income from foreign currency transactions including interest income from foreign loans
Proprietary Educational Institutions & Hospitals (non-profit) Proprietary educational institution any private school maintained & administered by private individuals or groups with an issued permit to operate from DECS, or CHED or TESDA Taxable at 10% on taxable income, except on certain passive income (which are subject to final tax) Predominance Test: if GI from unrelated trade/business/other activity > 50% of the total GI from all sources, ENTIRE taxable income shall be subject to the REGULAR corporate tax rate (35% Effective 2006) Distinguish from non-profit non-stock educational institutions which are exempt from tax on revenues and assets Actually, Directly and Exclusively used for educational purposes (See above for discussion).
E. Minimum Corporate Income Tax (MCIT) 1. MCIT Rate = 2% of gross income (GI) When to begin/apply MCIT? Beginning on the th 4 taxable year immediately following the year in which such corporation commenced its business operation (Commencement of Business Operation: Upon Issuance of BIR Certificate of Registration) Imposed when on the 4th taxable year, 2% of the corporations GI is greater than 35% of its TI. Example: for 2006 calendar year GI = P500,000 2% of GI = P10,000 TI = P27,000 35% of TI = P9,450 2006 IT = P10,000 Rationale: This is designed to prevent corporations from escaping being taxed by including frivolous expenses in their statement of income (Ex. Over statement of depreciation expense) 2. Carry Forward of Excess Minimum Tax Page 16 of 145
GOCCs
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Income Tax payable for 2007 = 17,500 (Regular Income Tax) 550 (MCIT Carry Forward from 2006: 10,000-9450) = 16,950 NOTE: You can deduct MCIT Carry Forward only if Regular Income Tax is greater than MCITY Situation B: If regular income tax is less than MCIT Pay MCIT For 2007 calendar year: GI = P500,000 TI = P20,000 2% of GI = P10,000 35% of TI = P7,000
B. MCIT - same as domestic corp. C. Special types of resident foreign corporations: International Air 2.5% On Gross Philippine carriers Billings (see case of Air Canada vs. CIR infra) International 2.5% On Gross Philippine Shipping Billings Offshore 10% Any interest income banking units derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units Offshore Exempt Income derived by banking units offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks, including Page 17 of 145
Income Tax payable for 2007 = 10,000 NOTE: MCIT carry forward as of 2007 is already 3,550 (550 from 2006 and 3,000 from 2007). So if in 2008, Regular Income Tax is already greater than MCIT, you may deduct 3,550 from payable Regular Income Tax. 3. Relief from MCIT MCIT may be suspended by the Sec of Finance when corporations losses are due to: (a) prolonged labor dispute (b) force majeure (c) legitimate business reverses 4. Gross Income (for purposes of applying MCIT) Gross Income = Gross Sales ( - ) Sales returns, discounts & allowances ( - ) Cost of Goods sold If taxpayer is engaged in sale of service: Gross Income = Gross Receipts
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Air Canada vs. CIR, CTA Case No. 6572, Dec. 22, 2004 It is evident that the definition of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 Tax Code covers the gross revenue derived from the carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place or sale or issue and the place of payment of the ticket or passage document. To originate would mean to cause the beginning of; to start (a person or thing) on a course or journey; to begin, start. In other words, the flights carrying the passengers must have originated or started from the Philippines. Verily, petitioner, being an off-line international carrier, as authorized to operate by the CAB and having no flights originating from the Philippines in a continuous and uninterrupted flight, cannot be taxed pursuant to Section 28(A)(3)(a) of the 1997 Tax Code, that is, based on their Gross Philippine Billings. However, although petitioner Air Canada is not liable to pay the tax as an international air carrier (2.5% on gross Phil. Billings), it is still liable to pay income tax as a resident foreign corporation. Under Section 22 of the 1997 Tax Code, the term resident foreign corporation applies to a foreign corporation engaged in trade or business within the Philippines, while the term non-resident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines. However, with regard to the term doing or engaged in business, there is no fixed or specific criterion as what constitutes doing or engaging in business. In the case of The Mentholatum Co., Inc., et al. vs. Mangiliman, et al., 72 PHIL 524, the Honorable Supreme Court had thoroughly and clearly explained the term in this way: There is no specific criterion as to what constitutes doing or engaging in or transacting business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. Page 18 of 145
Gross Philippine Billings For international air carriers, refers to gross revenue derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document Provided, tickets revalidated, exchanged and/or indorsed to another international airline form part of the GPB if the passenger boards a plane in a port or point in the Philippines o If the ticket is indorsed to another airline, the GPB will be charged to the transferee/indorsee Provided, for a flight which orginates in the Philippines but transshipment (transfer) of passenger takes place at any port outside the Philippine on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB. o Note: Transfer of airline company, not transfer of aircraft GPB rule in the NIRC is a departure from the old rule which emphasized where tickets were bought. Now we adopt the originating rule meaning to form part of GPB, passenger/cargo must QuickTime and a TIFF (Uncompressed) decompressor originate from the Philippines are needed to see this picture. Does not apply to domestic corporations (Ex. PAL) Carrier must be an alien resident corporation; if its not, then it will be subject to 35% tax on GI as non-resident alien corporation. Does not apply to offline carriers o On line carriers: those with landing rights in the Philippines
Gross Income includes interest, dividends, rents, royalties, salaries, premiums (except reinsurance prem.), annuities, emoluments or other fixed/determinable annual, periodic/casual gains, Capital Gains (not subject to FT)
NON-RESIDENT FOREIGN CORPORATION Cinematographic 25% On gross income Film owner, lessor or distributor Owner or lessors 4.5% On gross income of vessel charted by Philippine nationals Owner or lessors 7.5% On gross income of aircraft, machineries and other equipment
TAX SPARING CREDIT Tax reduced by the Philippines should be fully applied or credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of its domicile. This serves as an incentive by
A. In general
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