INDIRECT TAX vs.

WITHHOLDING TAX

Indirect Tax
- Taxes where the incidence of or the liability for the payment of the tax falls on
one person, but the burden thereof can be shifted or passed on to another
person.
- The VAT is an example of indirect taxes
- In indirect taxes, the incidence of taxation falls on one person but the burden
thereof can be shifted or passed on to another person, such as when the tax is
imposed upon goods before reaching the consumer who ultimately pays for it.

Withholding Tax
- Tax wherein the law requires the withholding agent to withhold and remit the
corresponding withholding tax to the BIR during the year a person’s income is
earned.
- This type of tax is a direct tax
- In case of withholding taxes, the incidence and burden of taxation fall on the
same entity, the statutory taxpayer. The burden of taxation is not shifted to the
withholding agent who merely collects, by withholding, the tax due from income
payments to entities arising from certain transactions and remits the same to the
government.

Note: Due to this difference, the deficiency VAT and excise tax cannot be “deemed” as
withholding taxes merely because they constitute indirect taxes

FINAL vs. CREDITABLE WITHHOLDING TAX

1. Final withholding tax (FWT)

- The amount of tax withheld is full and final;
- The liability for payment of the tax rests primarily on the withholding agent
as payor;
- In case he fails to withhold, the withholding agent will be liable for the
deficiency;
- The payee is not required to file any income tax return for the particular
income;
- The finality of the withheld tax is limited on that particular income and will
not extend to the payee’s other tax liability.

2. Creditable withholding tax (CWT)

- Taxes withheld on certain income payments are intended to equal or at
least approximate the tax due of the payee on said income;
- Creditable tax must be withheld at source, but should still be included in
the tax return of the recipient;
- The liability to withhold arises upon the accrual, not upon the actual
remittance. The purpose of the withholding tax is to compel the agent to
withhold under all circumstances

AVOIDANCE vs. EVASION

1. Tax avoidance
 - A scheme where the taxpayer uses legally permissible alternative method
of assessing taxable property or income, in order to avoid or reduce tax
liability.
- It is a tax saving device within the means sanctioned by law. This method
should be used by the taxpayer in good faith and at arm’s length.
- Validity: Legal and not subject to criminal penalty
- Effect: Minimization of taxes

2. Tax Evasion
- A scheme where the taxpayer uses illegal or fraudulent means to defeat or
lessen payment of a tax.
- It is a scheme used outside of those lawful means and when availed of, it
usually subjects the taxpayer to further or additional civil or criminal
liabilities
- Validity: Illegal and subject to criminal penalty Effect
- Effect: Almost always results in absence of tax payment

AMNESTY vs. EXEMPTION, CONDONATION

1. Amnesty
- Tax amnesty, being a general pardon 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. It partakes of an absolute
waiver by the government of its right to collect what is due it and to give
tax evaders who wish to relent a chance to start with a clean slate
- A tax amnesty, much like a tax exemption, is never favored or presumed
in law. The grant of a tax amnesty, similar to a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing
authority
- Immunity from all criminal, civil and administrative obligations arising from
non-payment of taxes
- General pardon given to all erring taxpayers
- Applied retroactively
- There is revenue loss since there was actually taxes due but collection
was waived by the government

2. Exemptions
- An immunity or privilege, a freedom from a charge or burden to which
others are subjected
- Immunity from civil liability only
- A freedom from a charge or burden to which others are subjected
- Applied prospectively
- No revenue loss because there was no actual taxes due as the person or
transaction is protected by
- In granting tax exemptions, the absolute majority vote of all the members
of Congress is required. It means at least 50% plus 1 of all the members
voting separately

3. Condonation
- in the nature of tax exemption. Such being the case, a law granting tax
condonations requires the vote of an absolute majority of the members of
the Congress
 If the creditor condones the indebtedness of the debtor the following rules
apply:
- On account of debtor’s services to the creditor the same is in taxable
income to the debtor.
- If no services were rendered but the creditor simply condones the debt, it
is taxable gift and not a taxable income.

FRINGE BENEFITS vs. DE MINIMIS

1. Fringe Benefits
- any good, service or other benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an individual employee,
except a rank and file employee, such as but not limited to:
a. Housing
b. Expense account
c. Vehicle of any kind
d. Household personnel such as maid, driver and others
e. Interest on loans at less than market rate to the extent of the difference
between the market rate and the actual rate granted
f. Membership fees, dues and other expenses athletic clubs or other
similar organizations
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to the employee or his dependents
j. Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows
If the benefit is not tax-exempt and the recipient is:
- A rank and file employee – the value of such fringe benefit shall be
considered as part of the compensation income of such employee subject
to tax payable by the employee.
- A managerial or supervisory employee – the value shall not be included in
the compensation income of such employee subject to tax. The fringe
benefit tax (FBT) is payable by the employer on behalf of the employee

2. De Minimis Benefits
- These are facilities or privileges furnished or offered by an employer to his
employees (managerial, supervisory or rank and file) that are of relatively
small value and are offered or furnished by the employer merely as a
means of promoting the health, goodwill, contentment and efficiency of his
employees.
- If given to supervisors and managerial employees, they are also exempt
from the fringe benefits tax.

De minimis benefits and their respective ceiling amounts:

a. Monetized unused vacation leave credits of employees

Qualify:
1. Private employees:
a. Vacation leave - exempt up to 10 days
b. Sick leave – always taxable
2. Government employees:
 Vacation and sick leave are always tax exempt regardless of the
number of days.
b. Medical cash allowance to dependents of employees
- Not exceeding ₱1,500 per semester or ₱250 per month
c. Rice subsidy
- ₱2,000 or one sack of 50-kg rice per month amounting to not more than
P2,000
d. Uniforms and clothing allowances
- Not exceeding ₱6,000 per annum (R.R. 8-2012)
e. Actual medical assistance, e.g. medical allowance to cover medical and
healthcare needs, annual medical/executive check up, maternity assistance, and
routine consultations
- Not exceeding ₱10,000 per annum
f. Laundry allowance
- Not exceeding ₱300 per month
g. Employee achievement awards under an established written plan which does not
discriminate in favor of highly paid employees (e.g. for length of service or safety
achievement)
- In the form of tangible personal property other than cash or gift certificate
with an annual monetary value not exceeding ₱10,000
h. Gifts given during Christmas and major anniversary celebrations
- Not exceeding ₱5,000 per employee per annum
i. Daily meal allowance for overtime work
- Not exceeding 25% of the basic minimum wage on a per region basis
j. Benefits received by virtue of Collective Bargaining Agreement (CBA) and
productivity incentive scheme
- Not exceeding ₱10,000 per employee per annum (R.R. 1-2015)

Note: All other benefits given by employers, which are not included in the above
enumeration shall NOT be considered as de minimis benefits, and hence, shall be
subject to income tax, as well as to withholding tax on compensation income. The
benefits provided in the Regulations shall apply to income earned starting the year 2011

ORDINARY ASSETS vs. CAPITAL ASSETS

1. Ordinary assets – refer to properties held by the taxpayer used in connection with
his trade or business which includes the following:

a. Stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable
year;
b. Property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
c. Property used in the trade or business of a character which is subject to the
allowance for depreciation provided in the nirc; and
d. Real property used in trade or business of the taxpayer.

Examples:
a. The condominium building owned by a realty company, the units of which are
for rent or for sale.
b. Machinery and equipment of a manufacturing concern subject to depreciation
c. The motor vehicles of a person engaged in transportation business.
 2. Capital assets – include property held by the taxpayer (whether or not connected
with his trade or business) other than the enumeration above.

Examples:
a. Jewelry not used for trade or business
b. Residential houses and lands owned and used as such
c. Automobiles not used in trade or business
d. Stock and securities held by taxpayers other than dealers of securities

Significance of determining whether the asset is ordinary asset or capital asset:

- They are subject to different rules. There are special rules that apply only to
capital asset transactions, to wit:

a. Holding period rule

b. Capital loss limitation
c. Net capital loss carry-over (NELCO)

The tax treatment in the preparation of annual income tax returns:

a. Capital assets
- Generally, income realized from the sale of capital assets are not reported
in the income tax return as they are already subject to final taxes (capital
gains tax on real property and shares of stocks not traded in the stock
exchange). What are to be reported in the annual income tax return are
the capital gains derived from the disposition of capital assets other than
real property or shares of stocks in domestic corporations, which are not
subject to final tax.
b. Ordinary assets
- Income realized from sale of ordinary assets is part of Gross Income,
included in the Income Tax Return

PRELIMINARY ASSESSMENT NOTICE (PAN) vs. FINAL ASSESSMENT NOTICE

(FAN)

1. PAN
- If after review and evaluation by the Commissioner or his duly authorized
representative, as the case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes, the said Office
shall issue to the taxpayer a PAN for the proposed assessment.
- It shall show in detail the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based

Note: Prior to the issuance of the PAN, the taxpayer may be allowed to make voluntary
payments of probable deficiency taxes and penalties

Requirements of a valid PAN

a. In writing; and
b. Should inform the taxpayer of the law and the facts on which the assessment is
made

- The sending of PAN to taxpayer to inform him of the assessment made is but
part of the “due process requirement in the issuance of a deficiency tax
 assessment,” the absence of which renders nugatory any assessment made
by the tax authorities.
- Failure to send the PAN stating the facts and the law on which the
assessment was made as required by the law, the assessment made by CIR
is void

2. FAN
- The CIR or his duly authorized representative may issue FLD/FAN:
a. If there is no need to issue a PAN, because the circumstances show that
it fall within the exceptions for the issuance of PAN;
b. If the taxpayer is in default for failure to respond to a PAN within a period
of 15 days from the receipt of PAN; or
c. If the CIR or his duly authorized representative does not agree with the
justifications stated by the taxpayer in his reply to the PAN
- The FLD/FAN calling for payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence on
which the assessment is based; otherwise, the assessment shall be void
- The FAN and FLD should always go together. The law requires that the
factual and/or legal bases of the assessment must be stated, and this
requirement is not satisfied by the issuance of FAN alone, a letter of
demand fills up the void and explains to the taxpayer how the deficiency
assessment was arrived at, including the reasons and legal bases for the
assessment

Period to issue FLD/FAN

- If the taxpayer, within 15 days from date of receipt of the PAN, responds
that he/it disagrees with the findings of deficiency tax or taxes, an
FLD/FAN shall be issued within 15 days from filing/submission of the
taxpayer’s response, calling for payment of the taxpayer's deficiency tax
liability, inclusive of the applicable penalties
-
Requirements of a valid FAN
a. In writing; and
b. Shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the FAN shall be void

Note: If the FAN is deemed insufficient insofar as compliance with Section 228 of the
NIRC is concerned, such insufficiency can be cured, if the FLD can show the legal and
factual bases relied upon in the issuance of the assessment which the FAN failed to
detail.