PRE-WEEK REVIEW TAXATION

Atty. Vic C. Mamalateo UP COLLEGE OF LAW July 4, 2007

SCOPE
• INCOME TAX
– WITHHOLDING TAX

• TAX ADMINISTRATION
– POWERS AND DUTIES OF BIR – POWERS OF BIR COMMISSIONER

• TAX REMEDIES
– REMEDIES OF GOVERNMENT – REMEDIES OF TAXPAYERS

CORPORATE TAXPAYERS
• DOMESTIC CORPORATION
– SUBSIDIARY – AFFILIATE – FOREIGN BRANCH OF DOMESTIC CORP

• FOREIGN CORPORATION
– RESIDENT FOREIGN CORPORATION
• PHIL BRANCH OF FOREIGN CORPORATION

– NON-RESIDENT FOREIGN CORPORATION

• TEST: LAW OF INCORPORATION

TYPES OF BRANCHES
• REGULAR BRANCH
– 35% ON NET INCOME FROM SOURCES WITHIN THE PHIL

• SPECIAL BRANCHES (TAXABLE) – ENTERPRISES WITHIN ECOZONE (RA 7916) OR FREEPORT ZONE (RA 7227) – 5% FINAL TAX ON GROSS INCOME – REGIONAL OPERATING HEADQUARTERS (RA 8756)-10% – PETROLEUM CONTRACTORS/SUB-CONTRACTORS (PD 1354) – 8% FINAL TAX – OFFSHORE BANKING UNITS – 10% TAX ON FOREX – INTERNATIONAL CARRIERS – 2.5% ON GPB • SPECIAL BRANCHES (EXEMPT) – REPRESENTATIVE OFFICE – REGIONAL HEADQUARTERS (RHQ)

INCOME TAX
• OFF-LINE INTERNATIONAL AIR CARRIER IS A RESIDENT FOREIGN CORPORATION
– SOLD TICKETS IN THE PHIL THRU LOCAL AGENTS – LIAISON OFFICE, AGENCY, OR BRANCH – 2.5% TAX ON GROSS PHIL BILLINGS

• SOURCE OF INCOME
– ACTIVITY (SALE OF TICKETS) IN THE PHIL – ENUMERATION IN SEC 37(A) NOT EXCLUSIVE

INCOME TAX
• JOINT VENTURE/PARTNERSHIP
– POOL OF MACHINERY INSURERS IS A PARTNERSHIP TAXABLE AS CORP
• COMMON FUND • EXECUTIVE BOARD • POOL’S WORK IS INDISPENSABLE, BENEFICIAL AND ECONOMICALLY USEFUL TO BUSINESS OF CEDING COMPANIES

– POOL’S REMITTANCES ARE DIVIDENDS – PRESCRIPTION IS NOT TOLLED, SINCE TAXPAYER CANNOT BE FOUND IN ADDRESS GIVEN IN INFORMATION RETURN

INCOME TAX
• YMCA, AS NON-STOCK, NON-PROFIT ASSOCIATION, IS SUBJECT TO INCOME TAX ON INCOME FROM PROPERTY AND ON ACTIVITY CONDUCTED FOR PROFIT • STRICT INTERPRETATION OF TAX EXEMPTION LAWS • COURTS CANNOT RULE ON THE WISDOM OR PROPRIETY OF LEGISLATION. THAT POWER BELONGS TO CONGRESS

INCOME TAX SYSTEMS
• GLOBAL SYSTEM – COMPENSATION INCOME – BUSINESS/PROFESSIONAL INCOME – CAPITAL GAIN, INVESTMENT INCOME, AND OTHER INCOME NOT SUBJECT TO FINAL TAX • SCHEDULAR SYSTEM – FINAL TAX ON CAPITAL GAINS • REAL PROPERTY IN THE PHILIPPINES • SHARES OF STOCK OF A DOMESTIC CORP – TAX ON PASSIVE INVESTMENT INCOME • DIVIDEND INCOME • INTEREST INCOME • ROYALTY INCOME

TYPES OF INCOME TAX
• TAX ON ORDINARY INCOME – REGULAR CORPORATE INCOME TAX – MINIMUM CORPORATE INC TAX TAX ON PASSIVE INVESTMENT INCOME – DIVIDEND INCOME OR BRANCH PROFIT REMITTANCE – INTEREST INCOME – ROYALTY INCOME – RENTAL INCOME (not all cases) TAX ON CAPITAL GAINS – REAL PROPERTY – SHARES OF STOCK OF DOMESTIC CORP

Marketing services rendered abroad
• Commissions paid for marketing services rendered abroad for a Phil. company is considered foreign-source income. The source of the income is the property, activity or service that produced the income. The fact that recipient of commission income is President and majority stockholder of the Phil. company does not alter the source of income. There are only two ways by which the President and other members of the Board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders agree to give it to them. If none of these conditions are present, commission income cannot be automatically attributed to petitioner’s position in the company.
(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)

INCOME TAX
• INTEREST INCOME FROM LONG-TERM DEPOSITS, INVESTMENTS/BONDS
– EXEMPT, IF RECEIVED BY INDIVIDUAL – TAXABLE, IF RECEIVED BY CORPORATION

• GAIN FROM SALE OF LONG-TERM BONDS AND CERT. OF INDEBTEDNESS IS EXEMPT FROM INCOME TAX, REGARDLESS OF RECIPIENT (INDIVIDUAL OR CORP)

Interest income of a corporation
• “Interest” is not synonymous with the term “gains” under Sec. 32(B)(7)(g) of the Tax Code. • In the enumeration of income in the Tax Code, gains derived from dealings in property and interests are separately listed. • The exemption of interest income of individuals from long-term bonds remain exempt from income tax because this is specifically provided under a separate section in the Tax Code.
• (Nippon Life Insurance Corp. vs. CIR, CA-GR SP No. 69224, Nov. 15, 2002).

CIR vs. P&G PMC 204 SCRA 378
• Phil Tax Code only requires that US shall allow P&G USA deemed paid the tax credit equivalent to 20%. The deemed paid tax credit allowed in Sec. 902 of US IRC is no more a credit for phantom taxes than is the deemed paid tax credit granted in Sec 30©(8), NIRC. • Task of our Court is to give effect to legislative design and objectives as they are written into statute even if some revenues have to be foregone in the process. • The economic objective of law reducing tax on dividend from 35% to 15% is to promote in-flow of foreign equity investments. The tax benefit should go to the foreign investor, not to the government of foreign investor.

CIR vs. Wander Philippines 160 SCRA 573
• BIR contends tax sparing credit applies only if foreign country allows foreign tax credit. Tax refunds are construed strictly against claimant. • Fact that Switzerland does not impose tax on dividends received from domestic corporation should be considered as full satisfaction of the condition that 20% differential is deemed credited by the Swiss government. • To deny privilege to taxpayer would run counter to very spirit of intent of PD 369 and discourage foreign investors from investing capital in the Phil

INCOME TAX
• TAXATION OF STOCK DIVIDENDS
– GEN RULE: EXEMPT FROM INCOME TAX – EXCEPTION: REDEMPTION OF STOCK DIVIDEND, DEPENDING ON TIMING AND MANNER, MAY BE TREATED AS CASH DIVIDEND; HENCE, SUBJECT TO TAX

Stock Dividends
• • Stock dividend which represents transfer of surplus to capital stock is not subject to income tax. Stock dividend may constitute taxable income to recipients if it gives the shareholder an interest different from that which his former stockholdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did the old – the new certificates plus the old representing the same proportionate interest in the net assets of the corporation. The receipt of tax-free stock dividends by the stockholder will reduce his cost or adjusted basis of the stocks in determining the gain or loss upon the subsequent sale or transfer thereof. If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution or cancellation, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits (CIR vs. CA and A. Soriano, 301 SCRA 152)

• •

CIR vs. S.C. Johnson & Sons GR 127105, June 25, 1999
• The purpose of “most-favored-nation clause” in tax treaty is to grant to the other contracting state tax treatment that is no less favorable than that which is granted to most favored among other countries. • Phil-Germany Tax Treaty imposes 10% on royalty, provided that “it” is ‘paid under similar circumstances’ to a resident of a third state. Matching credit of 20% is granted against German income. • Respondent: “It” refers to payment of royalty, not to payment of tax, since the phrase ‘paid under similar circumstances’ is followed by phrase ‘to a resident of a third state.’ This construction is based on sentence structure.

CIR vs. S.C. Johnson & Sons
• Petitioner: Concessional rate of 10% applies only if taxes imposed upon royalty under RP-US and RPGermany treaties are paid under similar circumstances. • This interpretation is based on logical reading of the text in light of fundamental purpose of treaties – to grant incentive to foreign investor by lowering tax (in Phil) and at same time crediting against domestic tax (of foreign investor) abroad a figure higher than what was actually collected in the Phil.

Coca-Cola Export Corp vs. CIR CTA Case 6861, Nov 22, 2005
• Phil, as state of source, and U.S., as state of residence, are permitted to tax royalties. There is double taxation. • U.S. allows tax relief from double taxation, subject to limitation. Phil may impose 25%, 15%, or 10% tax rate on royalty. • RP-Russia and RP-China Tax Treaties reveal similar provisions on relief from double taxation as those in RP-US Tax Treaty. There is no provision on matching credit similar to that in RP-Germany Tax Treaty.

Coca-Cola Export Corp vs. CIR
• BIR Ruling DA-ITAD No. 103-03, July 24, 2003 – Royalty paid in 2001, subject to 15% tax – Royalty paid starting in 2002, 10% tax • RMC 46-02 – RP-China Tax Treaty, effective Jan 1, 2002 – Tax on royalties paid to resident of U.S. and China can be considered paid under similar circumstances. – Contract giving rise to royalty has been approved by Phil competent authorities. – Claim for refund is supported by adequate documentary evidence (tax returns, O.R., etc.), and filed within prescriptive period. Royalty expense must have reflected amount paid.

RMC 46-2002
• PHIL-CHINA TAX TREATY (effective Jan. 1, 2002). The tax on royalties shall not exceed:
– 15% for royalties arising from the use of, or right to use, any copyright of literary, artistic or scientific work, incl. cinematographic films or tapes for television or broadcasting; or – 10% for royalties arising from the use of, or right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use, or right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Considering that the treaty with China does not contain a “matching credit” provision similar to that found in the treaty with Germany, tax on royalty payments to residents of China can be considered paid under similar circumstances to a resident of the U.S. and the mostfavored-nation clause in the RP-US Tax Treaty (RMC 46-2002, Sept. 2, 2002).

SOURCES OF INCOME
• REAL PROPERTY • PERSONAL PROPERTY
– TANGIBLE
• PRODUCED WITHIN THE PHIL AND SOLD WITHOUT OR VICE-VERSA • PURCHASE WITHIN THE PHIL AND SALE WITHOUT

– INTANGIBLE
• SHARES OF STOCK
– DOMESTIC CORPORATION – FOREIGN CORPORATION

• MOBILIA SEQUUNTUR PERSONAM

SOURCES OF INCOME
• INTERESTS • DIVIDENDS
– PAID TO DOMESTIC CORP AND RFC – PAID TO NON-RESIDENT FOREIGN CORP

• RENTALS AND ROYALTIES • SERVICES
– ONSHORE VS. OFFSHORE

• OTHER INCOME
– PREMIUM ON INSURANCE – TRANSPORT INCOME

TYPES OF WITHHOLDING TAX
• FINAL WITHHOLDING TAX
– PAID TO RESIDENT PERSON – PAID TO NON-RESIDENT FOREIGN PERSON

• CREDITABLE WITHHOLDING TAX
– COMPENSATION INCOME – EXPANDED WITHHOLDING TAX – MONEY PAYMENTS BY GOVERNMENT

INCOME TAX
• EXCESS WITHHOLDING (INCOME) TAX
– FOR 1997
• MAY BE CARRIED OVER ONLY TO 1998 • 1977 TAX CODE APPLIES EVEN IF ITR FILED IN 1998

– FOR 1998
• MAY BE CARRIED OVER TO SUCCEEDING YEARS • 1997 TAX CODE APPLIES • OPTION TO CARRY OVER EXCESS WITHHOLDING TAX IS IRREVOCABLE DURING THE LENGTH OF THE NEXT TAXABLE YEAR ONLY; THEREAFTER, HE MAY FILE CLAIM FOR REFUND OR TAX CREDIT

Advertising Expenses
• An expense is “ordinary” when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances. • An expense is “necessary” where the expenditure is appropriate or helpful in the development of taxpayer’s business or that the same is proper for the purpose of realizing a profit or minimizing a loss. • P9.4 M paid in 1985 for advertising a product was staggering incurred to “create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member.” • “Goodwill” generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not business expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672,
Apr. 24, 2003).

Donation
• Irrespective of the accounting method used, donation is recognized as a deduction from gross income in the year such donation was actually paid or made, not in the year the deed of donation was perfected. • The deductibility of donation is not governed by the ordinary rules on deductibility of the expense. • Donation must be both perfected and consummated before it can be allowed as a deduction.
• (Phil. Stock Exchange vs. CIR, CTA Case No. 5995, Oct. 15, 2002)

Branch profit remittance tax
• Branch profit of the Phil. branch used as additional capital investment of the foreign head office in the Philippine branch, pursuant to the requirements of the Bangko Sentral ng Pilipinas, is considered as profit constructively remitted abroad. • Branch profit remittance tax applies not only when the profit is actually remitted but also when such profit is constructively remitted to the head office abroad.

(ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

INCOME TAX
• DOUBLE TAXATION
• COMPARABLE OR SAME TAXES ARE IMPOSED BY TWO OR MORE STATES ON SAME TAXPAYER ON SAME SUBJECT MATTERS AND FOR IDENTICAL PERIODS

• WAYS OF AVOIDING DOUBLE TAXATION
• EXEMPTION METHOD • TAX CREDIT METHOD

• TAX ADMINISTRATION

ESTOPPEL
• ESTOPPEL DOES NOT APPLY TO GOV’T
– STATE CANNOT BE ESTOPPED BY THE MISTAKE OR NEGLECT OF ITS AGENTS & OFFICERS – ERRONEOUS APPLICATION OF LAW BY PUBLIC OFFICERS DO NOT BLOCK SUBSEQUENT CORRECT APPLICATION OF STATUTES – ESTOPPEL DOES NOT APPLY TO PRECLUDE SUBSEQUENT FINDING OF TAXABILITY NOR TO DEPRIVE GOV’T OF ITS RIGHT TO RAISE DEFENSES EVEN IF RAISED ONLY FOR THE FIRST TIME ON APPEAL

INJUNCTION
• NO COURT HAS AUTHORITY TO GRANT INJUNCTION TO RESTRAIN COLLECTION OF TAXES, EXCEPT WHEN COLLECTION WILL JEOPARDIZE INTEREST OF GOVERNMENT OR TAXPAYER • APPEAL TO CTA DOES NOT SUSPEND COLLECTION OF TAX

INJUNCTION
• NO COURT HAS AUTHORITY TO GRANT INJUNCTION TO RESTRAIN COLLECTION OF TAXES, EXCEPT WHEN COLLECTION WILL JEOPARDIZE INTEREST OF GOVERNMENT OR TAXPAYER • APPEAL TO CTA DOES NOT SUSPEND COLLECTION OF TAX

• REMEDIES OF GOVERNMENT

WARRANT OF DISTRAINT OR LEVY
• WDL MUST BE EFFECTED WITHIN FIVE YEARS FROM DATE OF ASSESSMENT • WDL MAY BE ISSUED AS STEP PRELIMINARY TO COLLECTION BY JUDICIAL ACTION • WDL MAY BE REPEATED UNTIL FULL AMOUNT DUE IS COLLECTED • “SATISFACTION” OF TAX DUE MEANS DISCHARGE PRO TANTO

COMPROMISE PENALTY
• COMPROMISE PENALTY
– AMOUNT WHICH TAXPAYER PAYS TO COMPROMISE TAX VIOLATION THAT MAY BE SUBJECT OF CRIMINAL PROSECUTION – MUTUAL AGREEMENT; MAY NOT BE IMPOSED BY BIR, IF TAXPAYER DOES NOT AGREE THERETO – IF TAXPAYER HAS EXPRESSED WILLINGNESS TO PAY COMPROMISE PENALTY IN AN APPEAL TO CTA, AMOUNT MAY BE COLLECTED AS PART OF JUDGMENT

CIVIL ACTION
• COLLECTIBILITY OF DELINQUENT TAX
– FINAL ASSESSMENT IS NOT PROTESTED WITHIN 30 DAYS FROM DATE OF RECEIPT, OR PROTESTED BUT BIR CONDITIONS ARE NOT COMPLIED WITH BY TAXPAYER – SELF-ASSESSED TAX SHOWN IN RETURN IS NOT PAID WITHIN DATE PRESCRIBED BY LAW – PROTEST AGAINST ASSESSMENT IS DENIED BY BIR OR 180 DAY PERIOD LAPSES AND TAXPAYER FAILED TO APPEAL TO CTA WITHIN 30 DAYS FROM DATE OF RECEIPT OR FROM LAPSE OF 180 DAY PERIOD

CIVIL ACTION
• WHO APPROVES?
– CIR OR REGIONAL DIRECTOR – SOLGEN, OR BIR SPECIAL ATTORNEYS OUTSIDE METRO MANILA, AFFIRMED BY SOLGEN

• WHERE FILED? RTC or CTA • HOW CIVIL ACTION BEGUN?
– FILE COMPLAINT WITH RTC – FILE ANSWER TO TAXPAYER’S PETITION FOR REVIEW AND PRAY FOR PAYMENT OF TAX; HENCE, EVEN IF NO RTC CASE WAS FILED, RIGHT TO COLLECT HAS NOT PRESCRIBED

CIVIL ACTION
• WHEN TO GO TO RTC?
– PRO FORMA PROTEST FILED
• BIR IS NOT REQUIRED TO RULE FIRST ON TAXPAYER’S REQUEST FOR REINVESTIGATION BEFORE INITIATION JUDICIAL ACTION TO COLLECT; DECISION OF CIR MAY BE INFERRED FROM HIS REFERRAL OF CASE TO SOL GEN

– VALID PROTEST FILED
• BIR HAS TO RULE FIRST ON TAXPAYER’S PROTEST SO AS NOT TO DEPRIVE HIM OF RIGHT TO APPEAL TO CTA

CRIMINAL ACTION
• NO CRIMINAL ACTION SHALL BE BEGUN WITHOUT THE APPROVAL OF COMMISSIONER • CRIMINAL ACTIONS FOR VIOLATIONS OF TAX CODE OR OTHER LAWS ENFORCED BY BIR MUST BE BROUGHT IN THE NAME OF THE GOVERNMENT AND CONDUCTED BY ITS LEGAL OFFICERS

CRIMINAL ACTION
• PENAL CODE
– EVERY PERSON CRIMINALLY LIABLE FOR A FELONY IS ALSO CIVILLY LIABLE

• TAX CODE
– CIVIL LIABILITY TO PAY TAX ARISES NOT BECAUSE OF ANY FELONY BUT UPON TAXPAYER’S FAILURE TO PAY TAX – CRIMINAL LIABILITY ARISES AS A RESULT OF ONE’S LIABILITY TO PAY HIS TAX – SEC. 73 PROVIDES IMPOSITION OF IMPRISONMENT OR FINE, OR BOTH, BUT FAILED TO PROVIDE COLLECTION OF TAX IN CRIMINAL PROCEEDINGS

CRIMINAL ACTION
ACQUITTAL OF TAXPAYER IN CRIMINAL ACTION DOES NOT NECESSARILY RESULT IN EXONERATION FROM CIVIL LIABILITY

– CIVIL LIABILITY IS NOT DEEMED INCLUDED IN CRIMINAL ACTION – DUTY TO PAY TAX IS IMPOSED BY STATUTE PRIOR TO AND INDEPENDENTLY OF ANY ATTEMPT BY TAXPAYER TO EVADE PAYMENT – TAX LIABILITY IS NOT CONSEQUENCE OF FELONIOUS ACTS CHARGED IN CRIMINAL PROCEEDING NOR IS IT MERE CIVIL LIABILITY ARISING FROM CRIME THAT COULD BE WIPED OUT BY JUDICIAL DECLARATION OF NON-EXISTENCE OF CRIMINAL ACTS CHARGED

CRIMINAL ACTION
• SUBSEQUENT PAYMENT OF TAX LIABILITY OR EXTINGUISHMENT OF TAX LIABILITY THRU PRESCRIPTION WILL NOT OPERATE TO ABSOLVE TAXPAYER’S CRIMINAL LIABILITY • SUBSIDIARY IMPRISONMENT CANNOT BE IMPOSED IN CASE OF INSOLVENCY OF TAXPAYER AS REGARDS TAX HE IS SENTENCED TO PAY • PENALTY SHALL BE IMPOSED ON PARTNER, PRESIDENT, GM, TREAS., OR OFFICER RESPONSIBLE FOR VIOLATION

CRIMINAL ACTION
• FILING OF CRIMINAL ACTION DURING PENDENCY OF PROTEST
– ASSESSMENT IS NOT NECESSARY TO CRIMINAL PROSECUTION FOR WILLFUL ATTEMPT TO EVADE TAX – CRIME IS COMPLETE WHEN VIOLATOR HAS KNOWINGLY AND WILLFULLY FILED FRAUDULENT RETURN WITH INTENT TO EVADE TAX – WHAT IS INVOLVED HERE IS NOT COLLECTION OF TAXES WHERE ASSESSMENT MAY BE REVIEWED BY RTC BUT CRIMINAL PROSECUTION FOR VIOLATION OF CODE

CRIMINAL ACTION
• CRIMINAL CHARGE WITHOUT ASSESSMENT
– ASSESSMENT IS NOT NECESSARY BEFORE CRIMINAL CHARGE IS FILED – CRIMINAL CHARGE NEED ONLY BE PROVED BY PRIMA FACIE SHOWING OF FAILURE TO FILE REQUIRED RETURN AND SUCH FACT NEED NOT BE PROVED BY AN ASSESSMENT – ISSUANCE OF ASSESSMENT IS DIFFERENT FROM FILING OF COMPLAINT FOR CRIMINAL PROSECUTION

CRIMINAL ACTION
• FOR CRIMINAL PROSECUTION TO PROCEED BEFORE ASSESSMENT, PRIMA FACIE SHOWING OF WILLFUL ATTEMPT TO EVADE TAX MUST EXIST • FORTUNE’S SITUATION IS FACTUALLY APART FROM UNGAB
– REG. WHOLESALE PRICE APPROVED BY BIR PRESUMED ACTUAL PRICE – NOT FRAUDULENT UNLESS BIR HAS FINAL DETERMINATION OF WHAT IS CORRECT TAX – PREL. INV. MAY BE ENJOINED UNDER EXCEPTIONAL CIRCUMSTANCES

SURCHARGE
• RATES:
– 50% - FALSE OR FRAUDULENT RETURN OR WILLFUL NEGLECT TO FILE RETURN – 25% - OTHER CASES

• TAX LAWS IMPOSING PENALTIES ON DELINQUENCIES ARE INTENDED TO HASTEN TAX PAYMENTS OR TO PUNISH EVASION OR NEGLECT OF DUTY

INTEREST
• JUST COMPENSATION TO THE STATE FOR DELAY IN PAYING TAX AND FOR USE OF FUNDS THAT BELONGS TO GOVERNMENT • 20% DEFIENCY INTEREST PER ANNUM FROM THE DATE TAX IS DUE UP TO DATE OF PAYMENT • COLLECTED AT THE SAME TIME, SAME MANNER, AND AS PART OF TAX

INTEREST
• JUST COMPENSATION TO THE STATE FOR DELAY IN PAYING TAX AND FOR USE OF FUNDS THAT BELONGS TO GOVERNMENT • 20% DEFIENCY INTEREST PER ANNUM FROM THE DATE TAX IS DUE UP TO DATE OF PAYMENT • COLLECTED AT THE SAME TIME, SAME MANNER, AND AS PART OF TAX

• REMEDIES OF TAXPAYERS

ASSESSMENT
• WHAT IS AN ASSESSMENT?
– NOTICE THAT TAXPAYERS OWES GOVERNMENT A SUM OF MONEY – CONTAINS COMPUTATION OF TAX LIABILITY AND DEMAND FOR PAYMENT OF TAX WITHIN

• PURPOSE OF ASSESSMENT
– TO ESTABLISH TAX LIABILITY

• MANDATORY REQUIREMENT
– TAXPAYER IS INFORMED IN WRITING OF FACTUAL AND LEGAL BASIS OF ASSESSMENT

ASSESSMENT NOTICE
• Sec. 228 of Tax Code requires BIR to inform taxpayer in writing of the laws and facts on which assessment is made. Failure to do so shall void the assessment. • Rule runs parallel to the due process clause. • Insufficiency of assessment notice may be cured by the demand letter which shows the legal and factual basis relied upon in issuance of assessment
(PNZ Marketing vs. CIR, CTA Case No. 5726, Dec. 14, 2001).

Validity of assessment in relation to Sec. 228
• Assessment is valid, even if notice merely contains the amount of taxes being assessed, without any details on how said amounts were arrived at, provided
– The report of investigation on which assessment was based has been sent to taxpayer; and – Said report details the findings, the facts and the law on which proposed assessments were based.
(Phil. Mining Service Corp. vs. CIR, CTA Case No. 5725, July 25, 2002)

Compliance with Sec. 228
• It is sufficient that computations are attached to the pre-assessment notice clearly showing the specific provisions of the law and the facts on how amounts of deficiency taxes were arrived at. • Requirement is deemed satisfied if during the informal conference, taxpayer is able to submit written comment on the issues raised in the report of audit.
• (Phil. Stock Exchange vs. CIR, CTA Case No. 5995, Oct. 15, 2002)

Assessment Notice
• Preliminary collection letter presupposes the existence of valid assessment notice. • Preliminary collection letter shall serve as assessment notice, if it was initial notice received by taxpayer, taxpayer did not receive any assessment notice, and no follow-up letter was sent or preliminary conference was arranged. • 30-day period to protest shall commence from date of receipt of preliminary collection letter.
• (United International Pictures vs. CIR, CTA Case No. 5884, Jan. 5, 2002)

ASSESSMENT
• FORMS OF ASSESSMENT
– FORMAL ASSESSMENT NOTICE – LETTER DEMANDING PAYMENT OF ERRONEOUSLY REFUNDED AMOUNT OR AMOUNT PAID BY BOUNCING CHECK – LETTER FROM REVENUE OFFICER GRANTING OPPORTUNITY TO DISPROVE FINDINGS OR SHOW CAUSE LETTER – FOLLOW-UP LETTER DULY RECEIVED BY TAXPAYER WITHIN PRESCRIPTIVE PERIOD. (TAXPAYER DENIED RECEIPT OF ORIGINAL DEMAND LETTER AND ASS. NOTICE)

ASSESSMENT
• WHEN MUST ASSESSMENT BE MADE?
– RETURN IS FILED
• NOT FALSE OR FRAUDULENT – 3 YRS FROM FILING • FALSE OR FRAUDULENT – 10 YRS FROM DATE OF DISCOVERY OF FILING OF FALSE OR FRAUDULENT RETURN

– NO RETURN IS FILED
• 10 YEARS FROM DATE OF DISCOVERY OF OMISSION

• IF ASSESSMENT DUE DATE FALLS ON A SATURDAY, GOVERNMENT HAS NEXT BUSINESS DAY WITHIN WHICH TO ASSESS

ASSESSMENT
• WHEN IS ASSESSMENT DEEMED MADE?
– ISSUE DATE OF ASSESSMENT NOTICE IS NOT RECKONING POINT FOR PRESCRIPTION – DATE ASSESSMENT NOTICE AND DEMAND LETTER IS RELEASED, MAILED OR SENT TO TAXPAYER CONSTITUTES ACTUAL ASSESSMENT – PRESUMPTION OF RECEIPT IN REGULAR COURSE OF MAIL APPLIES, IF PROPERLY ADDRESSED, POSTAGE PREPAID, AND WAS MAILED

ASSESSMENT
• ASSESSMENT IS MADE WHEN SENT WITHIN THE PRESCRIBED PERIOD, EVEN IF RECEIVED BY TAXPAYER AFTER EXPIRATION OF PRESCRIPTIVE PERIOD • RELEASE AND MAILING SHOULD BE SATISFACTORILY PROVED • MERE NOTATIONS ON RECORDS OF BIR OF MAILING, MADE WITHOUT TAXPAYER’S INTERVENTION OR CONTROL, AND WITHOUT SUPPORTING EVIDENCE CANNOT SUFFICE

ASSESSMENT
• WHERE TAXPAYER DENIES RECEIPT OF MAILED DEMAND LETTER, BIR MUST PROVE RECEIPT BY TAXPAYER • WHERE THERE IS NO BASIS FOR ASSESSMENT OF TAX, SENDING OF ASSESSMENT NOTICE AND ASSESSMENT DID NOT PRODUCE LEGAL EFFECT THAT WOULD WARRANT COLLECTION OF THE TAX

Proof that assessment notice was received
• If taxpayer denies having received the assessment notice, burden of proof is shifted to BIR. • Mere certification from Post Office on delivery of letter to taxpayer is not enough. • BIR should show that registered letter certified by PO actually contained assessment notice (United International Pictures vs. CIR, supra).

WHEN TO FILE PROTEST?
• 30 DAYS FROM DATE OF RECEIPT
– PERSONAL DELIVERY – MAIL

• IF ASSESSMENT NOTICE AND DEMAND LETTER ARE NOT RECEIVED OR IMPROPERLY ADDRESSED TO ANOTHER, 30-DAY PERIOD STARTS FROM DATE OF RECEIPT OF WDL OR NOTICE FROM RTC OR SOL GEN

Valid protest
• Valid protest of an assessment is one assailing the formal assessment notice (FAN) and the letter of demand, not the preliminary assessment notice (PAN). PAN is required merely to inform the taxpayer of the proposed assessment. • Failure to protest within 30 days will make the formal assessment notice final and executory. • Failure to respond to PAN within 15 days will render taxpayer in default and a FAN would subsequently be issued (Cebu Rosver Pawnshop vs. CIR, CTA Case No. 6425, Mar. 17, 2003).

Requisites for validity of waiver
• Waiver must indicate definite expiration date agreed upon by CIR and taxpayer • Waiver should state date of acceptance by BIR. Without the date, it cannot be determined whether waiver was accepted before expiration of 3-year period. • Taxpayer must be furnished copy of accepted waiver. Under RMO 20-90, second copy of waiver is for taxpayer. Fact of receipt by taxpayer of his copy should be indicated in the original copy (Phil.
Journalists vs. CIR, supra).

Requisites of waiver
• Waiver must be in the form identified in RMO 20-90; • Expiry date of period agreed upon is indicated in the waiver; • Waiver form requires statement of the kind of tax and amount of tax due; if not indicated in the waiver, there is no agreement; • Waiver is signed by taxpayer or his authorized representative. In case of corporation, waiver is signed by any responsible official. • CIR or his authorized representative shall sign waiver indicating that BIR has accepted and agreed to the waiver; • Date of acceptance by BIR is indicated; • Date of execution and acceptance by BIR should be before expiration of prescriptive period; • Waiver is executed in 3 copies; second copy is for taxpayer. Fact of receipt by the taxpayer should be indicated in the original copy.
• (Pfizer, Inc. vs. CIR, CTA Case No. 6135, Apr. 21, 2003; FMF Dev. Corp. vs. CIR, CTA Case No. 6153, Mar. 20, 2003)

Waiver signed by Comptroller
• Waiver signed by Comptroller is valid, even without letter or certificate of authority to execute waiver. • RMO 20-90 provides waiver must be signed by any of its responsible officials. • Law merely requires that waiver be signed by any of corporation’s responsible officials, not necessarily an authorized representative or officer.
• (Phil. Journalists vs. CIR, CTA Case No. 6108, May 14, 2002)

Validity of waiver
• Waiver is not valid if signed only by the taxpayer and attested to by a RDO, not by the Commissioner, or signed after the lapse of the 3-year period (Mirant Navotas Corp. vs. CIR, CTA Case No.
5949, Feb. 3, 2003).

FORMS OF DENIAL OF PROTEST
• DIRECT
– FORMAL DECISION OF DENIAL BY BIR COMMISSIONER

• INDIRECT
– FILING OF CIVIL CASE IN RTC WITHOUT RULING FIRST ON VALID PROTEST TIMELY FILED BY TAXPAYER – ISSUANCE OF WDL OR FINAL NOTICE BEFORE SEIZURE – REFERRAL OF CASE TO SOL GEN – LETTER REITERATING DEMAND FOR IMMEDIATE PAYMENT OF TAX

EFFECTS OF FAILURE TO FILE TIMELY PROTEST
• ASSESSMENT BECOMES FINAL AND UNAPPEALABLE • ASSESSMENT CANNOT BE DISPUTED IN CIVIL ACTION • PRESCRIPTION OF RIGHT TO ASSESS CANNOT BE RAISED IN COURT • NO INQUIRY CAN BE MADE AS TO THE MERITS OF THE CASE OR JUSTNESS OF JUDGMENT RELIED UPON

PRESCRIPTION
• PRESCRIPTION OF GOVERNMENT’S RIGHT
– TO ASSESS
• 3 YEARS FROM DATE OF FILING THE RETURN • 10 YEARS FROM DATE OF DISCOVERY

– TO COLLECT
• 5 YEARS FROM DATE OF ASSESSMENT • 10 YEARS (COURT ACTION TO FORFEIT BOND)

– TO FILE CRIMINAL ACTION
• 5 YEARS

Prescription
• The 3-year period within which to assess any deficiency tax commences after the last day prescribed by law for the filing of the return. • For VAT, each taxable quarter shall have its own prescriptive period. VAT return is filed quarterly and a final return is not required at the end of the year. • In case of creditable withholding taxes, the 3-year period shall be counted shall be counted from the last day required by law for filing monthly remittance return. Each monthly return is already a complete return. The annual information return submitted to BIR is just an annual report of income payments and taxes withheld and is not in the nature of a final adjustment return.
• (HPCO Agridev Corp. vs. CIR, CTA Case No. 6355, July 18, 2002)

PRESCRIPTION
• TAX CODE (SPECIAL LAW) PROVISIONS PREVAIL OVER CIVIL CODE (GENERAL LAW) PROVISIONS ON PRESCRIPTION • TO AVAIL OF 3-YEAR PRESCRIPTIVE PERIOD, TAXPAYER MUST ALLEGE AND PROVE THAT HE FILED RETURN • FOR THE 10-YEAR PERIOD TO APPLY, GOVT MUST ALLEGE AND ESTABLISH FRAUD

PRESCRIPTION
• PRESCRIPTIVE PERIOD MAY BE EXTENDED BY MUTUAL AGREEMENT IN WRITING BEFORE THE LAPSE OF THE PROPER PRESCRIPTIVE PERIOD • WAIVER MUST BE IN WRITING AND SIGNED BY BOTH CIR AND TAXPAYER • WAIVER IS INEFFECTIVE IF EXECUTED BEYOND THE PRESCRIPTIVE PERIOD • LAW DOES NOT AUTHORIZE EXTENSION ONCE PRESCRIPTION HAS SET IN

TAX RETURN
• TRANSCRIPT SHEETS ARE NOT RETURNS (INCOMPLETE INFO TO COMPUTE SPECIFIC TAX) • INCOME TAX RETURN FILED CANNOT BE CONSIDERED RETURN FOR COMPENSATING TAX • THERE IS NO OMISSION TO FILE RETURN WHERE TAXPAYER FAILED TO INCLUDE CERTAIN ITEMS, NOT DUE TO WILLFUL OMISSION OR FRAUD

AMENDED RETURN
• AMENDED RETURN IS SUBSTANTIALLY DIFFERENT FROM ORIGINAL RETURN, GOVT’S RIGHT TO ASSESS IS COUNTED FROM FILING OF AMENDED RETURN • IF ORIGINAL RETURN IS SUFFICIENTLY COMPLETE TO MAKE AN ASSESSMENT, SUBSEQUENT FILING OF AMENDED RETURN NEITHER STARTS ANEW RUNNING OF STATUTE OF LIMITATIONS NOR EXTENDS PRESCRIPTIVE PERIOD

Amended return
• The 1997 Tax Code authorizes the filing of amended return even after the filing of a claim for refund, both in the administrative and judicial levels, there being no provision prohibiting the amendment of a return once a claim for refund has been filed. • Amendment is prohibited only if made beyond the 3-year period allowed by law, and provided that “no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer (CIR vs. Citicorp
Capital Philippines, CA-GR SP No. 68554, Apr. 12, 2002).

Fraud
• BIR may assess tax in case of filing of false or fraudulent return within 10 years from date of discovery (Sec. 222, NIRC) • Mere failure to report certain income or the filing of false return are not sufficient basis for application of 10-year period. Apart from the element of mistake, a clear, unequivocal and willfull intention to evade the tax must be proven. • There is no fraud if BIR did not present evidence supporting allegation of fraud; taxpayer has sufficiently shown that non-reporting of income was based on its reliance on several provisions, rulings and accepted tax principles. • Existence of fraud is never presumed (Ayala Hotels vs. CIR, CTA Case No.
6002, Jan. 10, 2002).

FRAUD
• FRAUD MUST BE THE PRODUCT OF A DELIBERATE INTENT TO EVADE TAX
– MERE UNDERSTATEMENT IN TAX RETURN OF 7 PROPERTY WILL NOT NECESSARILY IMPLY FRAUD – SALE OF PROPERTY FOR PRICE LESS THAN ITS DECLARED FAIR MARKET VALUE ALONE DID NOT BY ITSELF JUSTIFY FINDING OF FALSE RETURN WHICH CONTAINS WRONG INFORMA-TION DUE TO MISTAKE, CARELESSNESS OR IGNORANCE

FRAUD
– THERE IS NO FRAUD IN FILING RETURN WHERE TAXPAYER PLACED A NOTATION THAT MONEY RECEIVED WAS PRESUMED GIFT BUT TURNED OUT AN ERROR AND NOW SUBJECT OF LITIGATION. SUCH NOTATION WAS PRACTICALLY AN INVITATION FOR INVESTIGATION BY BIR. FRAUD IS NEVER IMPUTED AND COURTS NEVER SUSTAIN FRAUD UPON CIRCUMSTANCES WHICH CREATE ONLY SUSPICION. UNDERSTATEMENT OF TAX IS NOT ITSELF PROOF OF FRAUD FOR THE PURPOSE OF TAX EVASION.

TAX CREDIT OR REFUND
• PAYMENT OF TAX UNDER PROTEST IS NOT NECESSARY • WRITTEN CLAIM FILED WITH BIR AND CTA • WITHIN TWO YEARS FROM DATE OF PAYMENT
– – – – QUARTERLY CORPORATE INCOME TAX CREDITABLE WITHHOLDING TAX DISSOLUTION OR MERGER OF CORPORATION CATEGORICAL DEMAND FOR PAYMENT OR REIMBURSEMENT

TAX CREDIT OR REFUND
• COMMISSIONER MAY GRANT REFUND OR TAX CREDIT EVEN WITHOUT WRITTEN CLAIM • PARTIAL PAYMENT OF TAX CANNOT BE BASIS FOR TAX REFUND • FOR TAXES PAYABLE ON INSTALLMENT, TWO YEAR IS COUNTED FROM PAYMENT OF LAST INSTALLMENT • PAYING TAX AFTER PERIOD TO PROTEST HAD LAPSED AND THEN CLAIMING REFUND IS NOT JUSTIFIED

Refund or Tax Credit
• Refund of excess creditable withholding taxes require compliance with three basic requirements:
– Claim for refund was filed within 2 years under Secs. 204© and 229, NIRC;
• 2-year period commences from date of filing of final adjustment return.

– Fact of withholding is established by a copy of statement duly issued by payor (withholding agent) to the payee, showing amount paid and tax withheld; and – Income upon which taxes were withheld were included in the return of recipient.
• (Banco Filipino Savings & Mortgage Bank vs. CIR, CTA Case No. 6374, Apr. 3, 2003)

Claim for refund with report on possible deficiency tax
• Memo report of revenue officer recommending issuance of preliminary assessment cannot serve as an obstacle to the grant of claim for refund, if alleged deficiency is not the issue presented in the petition for review. • If memo has not ripened into a formal assessment approved by the Reg. Director or CIR, same can proceed independently of the claim for refund, and its merits may be determined in separate proceedings. • Principle that taxes are not subject to set-off must govern, specially where the taxes and taxpayer’s claim are not fully liquidated, due and demandable (BPI Securities Corp. vs. CIR,
CTA Case No. 6089, Aug. 22, 2002).

WT certificates should be dated
• The certificates of Creditable Income Tax Withheld at Source is sufficient proof that an amount of tax indicated therein has been withheld. • However, in a claim for refund of excess creditable tax withheld, certificates with no date indicated shall not be acceptable and the claim for refund of the amount of withholding tax evidenced by such undated certificate shall not be allowed
(Ayala Life Assurance vs. CIR, CTA Case No. 5793, Nov. 9, 2001).

Original or certified copy of certificates
• Photocopied documents will be disallowed, if these cannot be compared with their respective originals or the photocopies were not certified as true and correct. • The success of a claim for tax refund depends on the accuracy of the documents and the Court frowns upon reception of photocopied documents especially if the subject of the inquiry is the very contents of said documents (Goodyear Phil. vs. CIR, CTA Case No.
5781, Oct. 3, 2002).

Refund or carry over of excess tax credits
• Sec. 69 – Taxpayer is granted an option to either refund or credit to the succeeding year the excess and overpaid income tax not utilized nor otherwise applied to the taxpayer’s income tax liabilities. If taxpayer, who opted to carry over his excess income tax in taxable year 1997 to taxable year 1998, was unable to fully utilize said 1997 excess income tax, he can apply for refund of said 1997 excess income tax. Refund shall be limited to the balance of the 1997 excess income tax after deducting whatever tax is due for 1998. Taxpayer has to prove that said 1997 excess income tax or its balance was not carried over to taxable year 1999 as indicated by the absence of “1997 Prior Year’s Credit” in the taxpayer’s 1999 Corporate Annual Income Tax Return (Citicorp Capital Phil. vs. CIR, CTA Case No. 6058,
Aug. 9, 2001).

Option to carry forward is irrevocable
• Option to carry forward excess creditable withholding tax is irrevocable for that taxable period and no application for cash refund or issuance of tax credit certificate shall be allowed therefor. • Excess CWT generated in 1998, which the taxpayer opted to be carried forward as indicated in its 1998 ITR, cannot be refunded even if said excess income tax was not actually carried over or applied in the succeeding year’s (1999) income tax return. • Taxpayer is left with no other recourse but to apply such 1998 excess credits to the succeeding years until the same are fully utilized (Filipinas Transport Industries vs. CIR, CTA Case No. 6073, Mar. 1, 2002).

Option to carry forward
• What Sec. 76 vests to a taxpayer is the right to refund all its excess creditable taxes as computed in its final adjustment return, and its option to have this excess either carried over and applied against the next fiscal year tax liability or to be refunded in cash. • One thing that this provision prohibits a taxpayer from doing is that once it opts to cary over and apply the excess tax to the next year’s tax liability, it could not have this excess refunded in the meantime during the length of the next taxable year. This is conveyed by the phrase “that such option shall be irrevocable for that taxable period,” the “succeeding taxable year” referred to in the law. • There is nothing, however, in the provision to prohibit the refund of this carried-over excess tax following the lapse of the taxable year to which it was carried over (CIR vs. Hopewell Tileman Power Systems, CA-GR SP No. 60898. Mar.
13, 2002; CIR vs. Citicorp Capital Phil., CA-GR SP No. 68554, Apr. 12, 2002).

CTA
• EXERCISES EXCLUSIVE APPELLATE JURISDICTION TO REVIEW BY APPEAL DECISIONS OF THE CIR AND COC • APPEAL MUST BE FILED WITHIN 30 DAYS FROM DATE OF RECEIPT OF DECISION ON DISPUTED ASSESSMENT. THIS IS JURISDICTIONAL. • IF DECISION IS NOT DISPUTED, ORDINARY ACTION MAY BE FILED WITH RTC • APPEAL TO CTA ON PROTEST CASES ALLOWED EVEN WITHOUT DECISION OF COLL. OF CUSTOMS DUE TO INACTION FOR UNREASONABLE LENGTH OF TIME

• END OF PRESENTATION

Sign up to vote on this title
UsefulNot useful