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Based on the course outline of Atty. Matila
TAXATION 1 NOTES
II. INCOME TAXATION Powers and Duties of the Bureau of Internal Revenue, shall comprehend : and coll ection of all national internal revenue taxes, fees and charges; 1. The assessment and 2. The enforcement of all forfeitures, penalties, and fines connected therewith; 3. The execution of judgment in all cases decided in its favor b y the Court of tax Appeals (CTA) and the ordinary courts; and 4. Effecting and administering the supervisory and police powers conferred to it by the Tax Code or other laws. AL L NATIONA L INTERNAL INTERNA L REVENUE TA XES, FEES AND CHARGES. CHARGES. Is used in the Tax Code in broad sense as encompassing all government revenues collectible by the CIR.
Powers and duties of the Commissioner 1. Power to interpret tax laws and to decide cases
1.1 Power to interpret tax laws. The CIR shall have the exclusive and original jurisdiction on interpret the provisions of the Tax Code and other special tax laws, laws, subject to review by the Secretary of Finance. 1.2 Power to decide cases. The CIR shall also have the power to decide the following ta exclusi ve appellate appellate jurisdi ction of t he CTA CTA, viz: cases but subject to th e exclusi 1.2.1 Disputed assessments , - decision of subordinates may be appealed to the commissioner, before the taxpayer files an appeal to the CTA. This demonstrates the application of the doctrine of exhaustion of administrative remedies, except that the option to appeal to the Commissioner belongs to and is not imposed on the taxpayer. Refunds of in ternal revenue taxes, taxes, fees or other c harges , 1.2.2 Refunds penalties impos ed in relation thereto , or 1.2.3 The penalties 1.2.4 Other matters arising under the Tax Code, other tax laws or portions thereof administ ered by the CIR. a.
Issuance of Revenue Regulations Revenue Regulations (RRs) - issuance signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the NIRC and related statues.
Revenue Regulations are likewise issued by the Commissioner of Internal Revenue but always subject to the approval of the Secretary of Finance. They are legislative rulings which necessitate hearing hearing and publ ication. Other Types of Issuances: Revenue Memorandum Circulars (RMC) Revenue Memorandum Orders (RMO) – (RMO) – Revenue Revenue Audit Memorandum Orders (RAMO) (RAMO) Revenue Memorandum Rulings (RMR) Revenue Revenue Bull etins (RB) (RB) Revenue Travel Assignment Orders (RTO) Revenue Special Orders (RSO) (RSO) Revenue Revenue Admini strativ e Orders (RAO) • • • • • • • •
b.
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Types of BIR Rulings
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TAXATION 1 NOTES
Based on the course outline of Atty. Matila
BIR Rulings – these are official positions of the CIR to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax la ws.
They are administrative interpretation of the tax laws as applied and implemented by the BIR. They can be relied upon by taxpayers and are valid until otherwise determined by the courts or modified or revoked by a subsequent ruling or opinion. The Secretary of Finance may, of his own accord, motu proprio review a ruling issued by the CIR. In such a case, the Secretary of Finance shall order the CIR to transmit a duplicate c opy of the BIR records. The CIR shall transmit such records within 15 days from receipt of notice of the request for transmittal. In the case of an affir mation , THE SoF may rely wholly on the reasons stated in the ruling of the CIR. In case of reversal or modif ication , the effectivity of the ruling shall be terminated upon the date of the receipt of written notice of such reversal or modification by the taxpayer or by the BIR.
1. Ruling of first impression – refers to the rulings, opinions and interpretations of the Commissioner with respect to the provisions of the Tax Code and other tax laws without established precedents. They likewise refer to reversal, modification or revocation of any existing ruling. Under Section 7 of the Tax Code, the Commissioner may not delegate to his subordinate the issuance of these rulings. Validity. It must be the first ever ruling issued by the CIR on that particular tax issue. It must also be within the scope of the authority granted to the CIR, and should not contravene any law or regulation or any decision of the Supreme Court..
It shall be submitted together with their dockets to the Secretary of Finance and shall not be valid unless reviewed and approved by the secretary of Finance. 2. Ruling with established precedents – refer to mere reiteration of previous rulings, opinions and interpretations of the Commissioner, as delegated to duly authorized internal revenue officers Validity. Rulings with established precedents shall be valid unless revoked by the Secretary of Finance. Copies of these rulings and issuances, with attached copies of its precedents shall be subm itted to the Secretory of Finance within five (5) days from the date of such ruling. Revocation and Modification . A ruling may be revoked or modified for any number of reasons such as when the facts as represented are discovered to be different from what is represented or not accord with the current views of the Commissioner.
3. ITAD Rulings – is a variation of a BIR Ruling in the sense that it specifically applies to the proper application of a T ax Treaty to a particular transaction. ITAD (International Tax Affair Division) - is the sole office charged with the receiving of tax treaty relief applications (TTRA). All tax treaty relief applications relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). All rulings relative to the application, implementation and interpretation of the provisions of Philippine tax treaties shall emanate from ITAD. (RMO 072-10 [AUGUST 25, 2010]) Q: Is there a need for an application f or a tax treaty relief wi th t he International
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TAXATION 1 NOTES
Based on the course outline of Atty. Matila
Tax Affairs Divis ion (ITAD) in order to avail of t he benefit? FIRST VIEW (GENERAL RULE): Yes. In MIRANT V. CIR [CTA CASE NO. 7796, FEBRUARY 21, 2011] , Mirant made income payments to VHL enterprises, a US nonresident foreign corporation and to WES World, a UK nonresident foreign corporation. It accordingly withheld the tax due on these interest payments. Thereafter, Mirant filed for a refund contending that the two foreign corporations have created “permanent establishments” in the Philippines and thus making applicable the lower withholding tax rate under the RP-UK and RP-US tax treaties. The CTA noted that under those treaties, VHL and WES World, while not having a fixed place of business have established “permanent establishments” in the Philippines because they have “furnished services through their employees or other personnel for a period or periods the aggregate of which is more than 183 days in a twelve-month period."
However, under RMO 01-2000, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Divi sion (ITAD). A foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. The CTA noted that Mirant did not make such application. Thus, the CTA finally held that the income payments of Mirant to VHL and WES, which are both non-resident foreign corporations, are subject to the final tax of 32% (now 30%).
SECOND VIEW (EXCEPTIONS:): No. In INTERPUBLIC GROUP OF COMPANIES, INC. VS. CIR [CTA CASE NO.7796 FEBRUARY 21, 2011] , the CIR also contended that the US company’s transactions were bereft of any tax treaty relief application with the International Tax Affairs Division (ITAD). On this point, the CTA ruled that the same is not necessary. The CTA stated that even with respect to the applicability of the 20% FWT under the RP-US Tax Treaty, a tax treaty relief application “is not m ade a condition precedent b y law.”
4. No Ruling areas – on which the BIR will not accept any request for ruling. The ruling function is limited to the determination of purely legal issues (as opposed to questions of fact) and the same need not be exercised where the law, rule or regulation is clear. Aside f rom matters declared as “No-Ruling Areas” in Revenue Bulletin No. 1 -2003, as amended by Revenue Bulletin No. 2-2003, non compliance with any of the requirements under this circular may prevent the Bureau from issuing an opinion on the request for ruling.
Moreover, the Bureau does not give tax planning advice and does not approve ta planning arrangements. Also, the Bureau will not resolve an issue through a ruling if the matter can be determined through another process (i.e. appeal) Lastly, the law and Legislative Division will not issue a ruling in response to a request in the following instances: a. The taxpayer has directed a similar inquiry to another office of the Bureau. b. The same issue involving the same taxpayer or a related taxpayer is pending in a case in litigation.
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Based on the course outline of Atty. Matila
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c.
c.
The same issue involving the same taxpayer is subject of a pending investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate or collection proceeding.
Kinds of Administrative Issuances i. Legislative Rule – also known as a quasi-legislative rule. It is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. Revenue Regulations are legisl ative rules . Court Action . In considering a legislative rule, a court is free to make 3 inquiries: a. Whether the rule is within the delegated authority of the administrative agency. b. Whether it is reasonable, and c. Whether it was issued pursuant to proper procedure.
ii. Interpretative Rule – designed to provide guidelines to the law which the administrative agency is in charge of enforcing. d.
Requisites of a valid administrative issuances
i. Due process required hearing and publication before adoption of legislative rules by administrative taxing bodies. REASON. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted, there must be a hearing. ii. The rule making power cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute.
An administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. The “plain meaning rule” or verbal legis in statutory construction should be applied such that where the words of a statute are clear, plain and free from ambiguity, it m ust be given its literal m eaning and applied without attempted interpretation.
e. f.
Binding effect of the administrative issuances or Revenue Regulations Non-retroactivity of Rulings, exceptions General Rule: Rulings are not retroactive if they are prejudicial to the taxpayer. (Sec. 246, NIRC) Exceptions: 1. Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR. 2. Where the facts subsequently gathered by the BIR is materially different from the facts on which the ruling is based. 3. Where the taxpayer acted in bad faith.
2. Power to obtain information, make assessments and prescribe additional requirements for tax administration and enforcement.
a.
Power to access Third Party Information without the consent of Taxpayer ( Ac ces s of reco rd s meth od of in co me det erm in ati on ) – a method where the BIR inquiries from third parties in order to verify gross receipts and the nonavailability of needed information through other methods
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Based on the course outline of Atty. Matila
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b.
Best evidence obtainable. – shall refer to any book, paper, record, data or other information or evidence obtained by the internal revenue officers, i. from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or ii. from any office or officer of the national and local governments, government agencies and instrumentalities, government-owned or controlled corporations and iii. from all other sources with whom the taxpayer had previous transactions of from whom he received any income,
which the internal revenue officer may use as basis for his assessment when the report required by law as basis for the assessment is not forthcoming within the time fixed by law, or when there is reason to believe that any return filed by the taxpayer is false, fraudulent, incomplete or erroneous. The purpose of the law is to enable the BIR to get at th e taxpayer’s records in whatever form they may be kept. This means that the original documents must be produced. If it could not be produced, secondary evidence must be adduced.
The law allows the BIR access to all relevant or material records or data in the person of the taxpayer. It places no limit or condition on the type or form or medium by which the record subject of the order of the BIR is kept. ( Hantex Trading Co., Inc. v. Commissioner of Internal Revenue, CA - G.R. SP No. 47172, September 30, 1998) c.
Termination Assessment. – Issued in the exercise of the authority to terminate taxable period.
The following are the instances when the CIR may terminate the taxable period and order the immediate payment of the tax for the terminated period and any remaining tax that is unpaid: 1. When the taxpayer is retiring from business subject to tax; 2. The taxpayer intends to leave the Philippines or to remove his property therefrom or to hide or conceal his property; or 3. The taxpayer is performing any act tending to obstruct the proceedings for the collection of the tax for the past or c urrent quarter or year or to render the same totally or partially ineffective unless such proceedings are begun immediately. How. The Commissioner shall declare the tax period of a taxpayer terminated at any time and send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, as ma y be unpaid.
Because of the termination of the taxable period, said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the CIR. d.
Jeopardy Assessment. Delinquency tax assessment which was assessed without the benefit of complete or partial audit by an authorized revenue officer, who has reason to believe that the assessment and collection of a deficiency tax will be je opardized by delay because of the taxpayer’s failure to: comply with the audit and investigation requirements to present his books of accounts and/or pertinent records, or •
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Based on the course outline of Atty. Matila
TAXATION 1 NOTES
•
to substantiate all or any of the deductions, exemptions, or credits claimed in his return. [Sec. 3.1 (a), Rev. Regs. No. 6-2000)
Jeopardy assessment is an indication of the doubtful validity of the assessment, hence it may be subject to a compromise. [Sec. 3.1 (a), Rev. Regs. No. 6-2000] e.
Power to issue summons and take testimonies. i. Right of the taxpayer to self-incrimination - During investigation, taxpayer may invoke his constitutional right to refuse to answer any incriminating question. The following rules should be considered. 1. In order for the self-incrimination rule to apply, there must be a criminal complaint filed with the DOJ. The recommendation of a Revenue Officer is not enough. 2. The person summoned may not assert the right with respect to corporation books and records, even though he is the sole owner of the corporation or even though, as an officer of the corporation, he would be criminally implicated by what the corporation records contain. He may assert the privilege only where a revelation of the matter sought from him would indicate that he has violated a law. 3. Disclosure of privileged communications cannot be compelled through a subpoena. In particular, documents and papers in the hands of taxpayer’s counsel are subject to attorney-client privilege if those documents and papers relate to confidential communications
ii. CIR has no contempt powers - Simply because the Commissioner is not judicial officer and not even a quasi-judicial officer .
3. Power to compromise or abate taxpayer’s liability and authority to refund or credit taxes COMPROMISE - A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one already commenced (Art. 2028, New Civil Code). Compromise involves a reduction of the taxpayer’s liability, while abatement means that the entire tax liability of the taxpayer is cancelled.
A compromise penalty could not be imposed by the BIR, if the taxpayer did not agree. A compromise being, by its nature, mutual in essence requires agreement. The payment made under protest could only signify that there was no agreement that had effectively been reached between the parties. (Vda. de San Agustin, et al., v. Commissioner of Internal Revenue, G. R. No. 138485, September 10, 2001) a.
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Instances when the CIR may compromise taxpayer’s liability – Cases which may be compromi sed 1. Delinquent accounts 2. Cases under administrative protests 3. Civil tax cases being disputed before the courts 4. Collection cases filed in courts 5. Criminal violations, other than those already filed in court or those involving criminal tax fraud; and, 6. Cases covered by pre-assessment notices but taxpayer is not agreeable to the findings of the audit office as confirmed by the review office. (Sec.2, Rev. Reg. 72001)
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Based on the course outline of Atty. Matila
TAXATION 1 NOTES
Exceptions : 1. Withholding tax cases; 2. Criminal tax fraud cases; 3. Criminal violations already filed in court; 4. Delinquent accounts with duly approved schedule of installment payments; 5. Cases where final reports of reinvestigation or reconsideration have been issued resulting to reduction in the original assessment and the taxpayer is agreeable to such decision. 6. Cases which become final and executory after final judgment of a court, where compromise is requested on the ground of doubtful val idity of the assessment (RR. 30 –2002); 7. Estate tax cases where compromise is requested on the ground of financial incapacity of the taxpayer. (RR. 30 –2002) Requisites: 1. The taxpayer must have a tax liability. 2. There must be an offer (by the taxpayer of an amount to be paid by the taxpayer) 3. There must be an acceptance (by the Commissioner or taxpayer as the case may be) of the offer in the settlement of the original claim. Officers authorized to compromise 1. The Commissioner of Internal Revenue (CIR) with respect to criminal and civil cases arising from violations of the Tax Code [Secs. 7(C) and 204, 1997 NIRC]. This power of the CIR is discretionary and once exercised by him cannot be reviewed or interfered with by the Courts. (Koppel, Philippines vs. Commissioner, GR No. L-1977, September 21, 1950) 2. By the Regional Evaluation Board composed of: a. Regional Director as Chairman, b. Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions, and c. Revenue District Officer having jurisdiction over the taxpayer, as members; on assessments issued by the regional offices involving basic taxes of P500,000 or less, and minor criminal violations. •
b.
Authority to compromise criminal violations, exceptions General Rule: All criminal violations under the CTRP may be compromised. Exceptions: 1. Those already filed in court 2. Those involving fraud [Sec. 204(B), 1997 NIRC]. Extent of the Commissioner’s Discretion to Compromise Criminal Violations 1. Before the complaint is filed with the Prosecutor’s Office: The CIR has full discretion to compromise except those involving fraud.
2.
After the complaint is filed with the Prosecutor’s Office but before the information is filed with the court: The CIR can still compromise provided the prosecutor must give consent.
3. Af ter in fo rm ati on is fi led wi th th e co ur t: The CIR is no longer permitted to compromise with or without the consent of the Prosecutor. (People vs. Magdaluyo, GR No. L-16235, April 20, 1961) This is more so, when the court has rendered a final judgment. As a mere agent of the Government, the Commissioner is not authorized to accept anything less
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TAXATION 1 NOTES
Based on the course outline of Atty. Matila
than what is adjudicated in favor of the Government. By virtue of such final judgment, the Government has already acquired a vested right . Nature of a Compromise in Extrajudicial Settlement of t he Taxpayer’s Criminal Liability for his Violation
It is consensual in character, hence, m ay not be imposed on the taxpayer without his consent. The BIR may only suggest settlement of his tax liability through a compromise. The extra-judicial settlement and the amount of the suggested compromise penalty should conform with the schedule of compromise penalties provided under the relevant BIR regulations or orders. Remedy in case the taxpayer refuses or fails to abide the tax comprom ise 1. Enforce the compromise a. If it is a judicial compromise, it can be enforced by mere execution. A judicial compromise is one where a decision based on the compromise agreement is rendered by the court on request of the parties. b. Any other compromise is extrajudicial and like any other contract can only be enforced by court action. 2. Regard it as rescinded and insist upon original demand (Art. 2041, Civil Code).
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Withholding tax cases are not subject to compromise, exceptions Commissioner may compromise the payment of any internal revenue tax when: 1. A reasonable doubt as to t he validity of th e claim against the taxpayer exists; or a. The delinquent account or disputed assessment is one resulting from a jeopardy assessment. b. The assessment seems to be arbitrary in nature, appearing to be based on presumptions, and there is reason to believe that its is lacking in legal and/or factual basis; or c. The taxpayer failed to file an administrative protest on account of the alleged failure to receive notice of assessment or preliminary assessment and there is reason to believe that its is lacking in legal and/or factual basis; or d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days from receipt of final assessment notice and there is reason to believe that its is lacking in legal and/or factual basis; or e. The taxpayer failed to elevate to the CTA an adverse decision of the Commissioner, or his authorized representative, in some cases, within 30 days from receipt thereof and there is reason to believe that its is lacking in legal and/or factual basis; or f. The assessment were issued on or after Jan. 1, 1998, where the demand notice allegedly failed to comply with the formalities prescribed u nder Sec. 228 of the 1997 NIRC; or g. Assessments made based on the “Best Evidence Obtainable Rule” and there is reason to believe that the same can be disputed by sufficient and competent evidence. h. The assessment was issued within the prescriptive period for assessment as extended by the taxpayer's execution of Waiver of the Statute of Limitations the validity or authenticity of which is being questioned or at issue and there is strong reason to believe and evidence to prove that it is not authentic. (RR. 30 – 2002)
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Based on the course outline of Atty. Matila
TAXATION 1 NOTES
i. The assessment is based on an issue where a court of competent
jurisdiction made an adverse decision against the Bureau, but for which the Supreme Court has not decided upon with finality. (RR. 08-2004). 2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax [Sec. 204(A), 1997 NIRC). In such case, the taxpayer should waive the confidentiality privilege on bank deposits under RA No. 1405 [Sec. 6(F)(2), NIRC]. Financial Incapacity. — The offer to compromise based on fin ancial incapacity may be accepted upon showing that:
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a.
The corporation ceased operation or is already dissolved. Provided, that tax liabilities corresponding to the Subscription Receivable or Assets distributed/distributable to the stockholders representing return of capital at the time of cessation of operation or dissolution of business shall not be considered for compromise; or
b.
The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the original capital by at least 50%, provided that amounts payable or due to stockholders other than business-related transactions which are properly includible in the regular "accounts payable" are by fiction of law considered as part of capital and not liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the tax liability; or
c.
The taxpayer is suffering from a networth deficit (total liabilities exceed total assets) computed by deducting total liabilities (net of deferred credits and amounts payable to stockholders/owners reflected as liabilities, except business-related transactions) from total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as appraisal increases in fixed assets), taken from the latest audited financial statements, provided that in the case of an individual taxpayer, he has no other leviable properties under the law other than his family home; (Sec. 3, RR. 30 –2002).
d.
The taxpayer is a compensation earner with no other source of income and the family’s gross monthly compensation does not exceed (P10,500/month if single; P21,000/month if married), and that it appears that the taxpayer possesses no other leviable/ distrainable assets, other than his family home; or
e.
The taxpayer has been granted by the SEC or by any competent tribunal a moratorium or suspension of payments to creditors, or otherwise declared bankrupt or insolvent. (Sec. 3, RR. 07-2001)
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Based on the course outline of Atty. Matila
TAXATION 1 NOTES
The Congressional Oversight Committee, under Section 290 of t he 1997 NIRC is empowered to requir e the BIR: a. The submission of all pertinent information, including but not limited to industry audits, collection performance data, status reports on criminal actions initiated against persons; and b. The submission of taxpayer returns.
Minimum Compromi se Rates (MCR) of any tax liability a. In case of financial incapacity: MCR = 10% of the basic assessed tax b. Other cases: MCR = 40% of the basic assessed tax [Sec. 204(A), 1997 NIRC] Ap pr ov al o f t he c om pr om is e by th e Eval uat io n B oar d i s r equ ir ed w hen a. the basic tax involved exceeds P1,000,000.00, or b. the settlement offered is less than the MCR. NOTE: The MCR may be less than the prescribed rates of 10% or 40%, as the case may be, provided it is approved by the Evaluation Board (composed of the BIR Commissioner and the four BIR Deputy Commissioners) d. Instances when the CIR may abate or cancel taxpayer’s liability.
The Commissioner may abate or cancel a tax liability when
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1.
The tax or any portion thereof appears to be unjustly or excessively assessed; [Sec. 204(B), 1997 NIRC]. a. When the filing of the return/payment is made at the wrong venue; b. When the taxpayer’s mistake in payment of his tax is due to erroneous written official advice of a revenue officer; c. When the taxpayer fails to file the return and pay the tax on time due to substantial losses from prolonged labor dispute, force majeure, legitimate business reverses, provided, however, the abatement shall only cover the surcharge and the compromise penalty and not the interest imposed under Sec. 249 of the Code; d. When the assessment is brought about or the result of taxpayer’s non compliance with the law due to a difficult interpretation of said law. e. When the taxpayer fails to file the return and pay the correct tax on time due to circumstances beyond his control, provided, however, the abatement shall only cover the surcharge and the compromise penalty and not the interest imposed under Sec. 249 of the Code; f. Late payment of the tax under meritorious circumstances (ex. Failure to beat bank cut-off time, surcharge erroneously imposed, etc.) (Sec. 2, Rev. Reg. 13-2001)
2.
The administration and collection costs involved do not justify the collection of the amount due [Sec. 204(B), 1997 NIRC]. a. Abatement of penalties on assessment confirmed by the lower court but appealed by the taxpayer to a higher court b. Abatement of penalties on withholding tax assessment under meritorious circumstances
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c. Abatement of penalties on delayed installment payment under meritorious circumstances d. Abatement of penalties on assessment reduced after reinvestigation but taxpayer is still contesting reduced a ssessment; and e. Such other circumstances which the Commissioner may deem analogous to the enumeration above. (Sec. 3, Rev. Reg. 13-2001) 3.
The Commissioner may also, even without a claim therefor, refund or credit any tax where on the face of the return upon which payment was made such payment appears clearly to have been erroneously paid (Sec. 229, 1997 NIRC)).
3. Duty to ensure the provision and distribution of forms, receipts, certificat es and appliances and the acknowledgement of the payment of taxes. 4. Power to create revenue district, with the approval of the secretary of finance. 5. Power to make arrest and seizures This does not require any previous warrant but it must cover only violations committed within the view of the internal revenue officials and employees when the taxpayer violates any penal law, rules or regulation administered by the BIR.
The constitution prohibition on arrests and seizures without warrants refers only to unreasonable searches and seizures. It is not unreasonable to effect searches or seizures without warrants if the violations are done in the presence of the revenue officers. Other than the aforesaid instances, however, search and seizure warrants first be obtained from the proper courts. 6. Power and duty to assign internal revenue officers involved in excise tax functions to establishment where articles subject to excise tax are produced or kept. 7. Power to assign internal revenue officers to other duties. When violations of tax laws and regulations should be reported to the Commissio ner 1. The internal revenue officer discovers evidence of a violation NIRC or any law, rules or regulations administer by the BIR; 2. The violation is of such character as to warrant the institution of criminal proceedings; 3. He shall immediately report the facts to the CIR, through his immediate superior, giving the name and address of the offender and the names of the witnesses, if possible; 4. In urgent cases, the Revenue Regional Director or the RDO, as the case may be, may send the report to the corresponding prosecuting officer, but a copy of his report shall be sent to the CIR Ar e Leg al Off ic ers of th e BIR aut ho rized To Ins ti tu te Appeal Pro ceed in gs With ou t The Partic ipation Of The Solicitor General? NO. The institution or commencement before a proper court of civil and criminal actions and proceedings arising under the Tax Reform Act which shall be conducted by legal o fficers of the BIR is not in dispute. An appeal from such court, however, is not a matter of right. It is still the Solicitor General who has the primary responsibility to appear for the government in appellate proceedings. (Commissioner vs. La Suerte Cigar and Cigarette Factory, GR No. 144942, July 4, 2002)
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Based on the course outline of Atty. Matila
8. Power to allocate income and deductions. Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or to clearly reflect the income of any such organization, trade or business. 9. Duty to submit report and provide information 10. Authority to delegate power; exceptions - 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) R.I.CA 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 A bate any tax liability provided however that the regional evaluation board may compromise: i. assessments issued by regional offices involving deficiency taxes of P500,000 or less and ii. minor criminal violations as may be determined by the rules and regulations iii. discovered by regional and district officials 11. Power to require taxpayers to file bond to secure payment of tax liabilities or otherwise to assure compliance with certain requirements laid down by ta laws or regulations 12. Authority to give an informer ’s reward. (Sec. 282) a. For violations of the NIRC, a reward of 10% of the revenues, surcharges, or fees recovered and/or fine or penalty imposed and collected or P 1 M per case, whichever is lower shall be given to: 1. any person who voluntarily gives definite and sworn information not yet in the possession of the BIR leading to the discovery of fraud upon the Internal Revenue Laws and/or any violations thereof 2. an informer where the offender has offered to compromise the violation of law comiited by him and his offer has been accepted and collected by the CIR . This excludes an Internal Revenue Officer/employee or other public official/employee, or his relative within the sixth degree
* This shall not refer to a case already pending or examined by the CIR b . For the discovery and seizure of smuggled goods - a reward of 10% of the FMV of the smuggled and confiscated goods or P 1 M per case, whichever is lower, shall be given to persons instrumental in the discovery and seizure of such smuggled goods.
* This does not apply to all public officials whether incum bent or retired, who acquired the information in the course of performance of their duties during their incumbency.
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TAXATION 1 NOTES
Based on the course outline of Atty. Matila
INCOME, TAXABLE INCOME AND INCOME TAX Income – for purposes of income taxation, refers to any wealth which flows into the taxpayer other than a mere return of capital. The term has been variously interpreted to mean: cash received or its equiv alent , the amount of money coming to a person within specific time or something distinct from pri ncipal or capital • • •
Taxable Income – (elements of a taxable income) Income, gain or profit is subject to income tax when the following conditions are present:
1. There is income, gain or profit (existence of income). – for tax purposes, income does not refer only to the money a taxpayer receives but includes anything of value . 2. The income, gain or profit is not exempt from income tax. - An income may have other elements but the law may specifically exclude the same from income for tax purposes i.e. certain passive incomes excluded from income as they are already subject to final taxes . 3. The income, gain or profit is received or realized during the taxable year (realization of income) - Even if there is material gain, not excluded by law, if the material gain is not yet realized by the taxpayer, then there is no income to speak of. Income Tax – a tax based on income, gross or net. Refers to the tax on the earnings derived by a taxpayer for each taxable year arising from : (S.T.E.P.) employment, or for s ervices rendered, or for engaging in t rade or business or for exercising a p rofessions • • • •
TESTS ON T AXABIL ITY OF INCOME 1. Flow of Wealth Test – The determining factor for the imposition of income tax is whether any gain was derived from the transaction. 2. Realization Test - unless the income is deemed "realized," there is no taxable income. 3. Economic-Benefit Principle Test -flow of wealth realized is taxable only to the extent that the taxpayer is economically benefited.
CRITERIA USED IN IMPOSING PHILIPPINE INCOME TAX The criteria used by our Congress in imposing the Philippine income ta under the NIRC of 1997 are as follows: Citizen Principle – Under this principle the basis of the imposition of income tax is the taxpayers’
citizenship. All citizens of the Philippines, whether residents or non-residents, are subject to our income tax law. In the case of resident citizens, they are subject to the income tax on income derived from within and without the Philippines, while non residents are only subject to the incom e tax on the income derived from within the Philippines. Incomes derived by a Filipino overseas contract worker from sources without the Philippines are not subject to Philippine Income Tax. This is in recognition of the contribution made by such workers towards strengthening our international reserves through the foreign exchange they bring into the country. Principle of Mobilia Sequuntur Personam . ( Income follows the income earner). The income is thus taxed in the place where the owner (income earner) is located and not in the
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place where the income is earned or where the income originated. This applies only to resident citizens on their incomes derived from sources without the Philippines. Resident Principle – Follows the territoriality principle. The basis of the imposition of income
tax in this case is the residence of the taxpayer. All income derived by persons residing in the Philippines, whether citizens or aliens, whether domestic corporation or foreign corporations, shall be subject to income tax on the income derived from sources within the Philippines.
Rationale why corporations are subject to tax . Corporations owe their existence and the privilege to do business to the government. It is therefore fair for the government to require them to make reasonable contributions to the public expenses Source Principle - Follows the territoriality principle. The basis of the imposition of income tax
under this principle is the source of income. All income derived f orms sources within the Philippines shall be subject to income tax. Thus, nonresident citizens or aliens and foreign corporations who derived income from within the Philippines shall also be liable for income tax on all income derived within the country.
FEATURES OF INCOME TAX
The Philippine tax system is: 1.
Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed. 2. Income tax is a progressive tax since the tax base increases as the tax rate increases. 3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. The Philippines follows the semi-schedular or semi-global system of income taxation
KINDS OF TAXPAYERS INDIVIDUAL TAXPAYERS a. citizens (1) resident citizens (RC) (2) non-resident citizens (NRC) b. aliens (1) resident aliens (RA) (2) non-resident aliens (NRA) (a) engaged in trade or business within the Phils. (NRAETB) (b) not engaged in trade or business within the Philippines (NRANETB) CORPORATIONS a. Domestic (DC) b. Foreign (1) resident foreign corporation (RFC) (2) non-resident foreign corporation (NRFC)
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C. Joint Ventures and Consor tiums d. Properitary Educational Institutions and non-profit Hospitals e. Partnerships Except General Professional Partnership f. Estates g. Trusts
INDIVIDUALS WHO A RE T AXABL E?
1. 2.
Resident Citizen Non-resident Citi zen A non-resident citi zen means, a Filipino citizen:
a.
who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein; who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year; who is previously considered as a non-resident and who arrives in the Philippines at anytime during the taxable year to reside thereat permanently shall be considered non-resident for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival [Sec.22 (E), NIRC]
b. c. d.
NOTE: An overseas contract w orker (OCW) is taxable only on income derived from sources within the Philippines. [Sec. 23 (B)(C)] A seaman is considered as an OCW provided the following requirements are met: 1. receives compensation for services rendered abroad as a member of the complement of a vessel; and 2. such vessel is engaged exclusively in international trade.
Based on the above provisions, there are three (3) types of nonresident citizens, namely: (1) immigrants; (2) employees of a foreign entity on a permanent basis; and (3) overseas contract workers. Immigrants and employees of a foreign entity on a permanent basis are treated as nonresident citizens from the time they depart from the Philippines. However, overseas contract workers must be physically present abroad most of the time during the cale ndar year to qualify as nonresident citizens. 3. 4.
Resident alien - means an individual whose residence is within the Philippines and who is not a citizen thereof. [Sec.22 (F, NIRC)] Non-resident alien engaged in trade or business wit hin the Philippi nes. (NRAETB) A non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen thereof. [Sec.22 (G)]
The term trade or business includes the performance of the functions of a public office. [Sec. 22 (S)]
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The term trade, business or profession shall not include performance of services by the taxpayer as an employee. [Sec. 22 (CC)] A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines Section 22(G) notwithstanding [Sec. 25(A)(1)] 5. Non-resident alien not engaged in trade or business wi thin t he Philip pines . (NRANETB) ONLY RESIDENT CITIZENS are taxable for income derived from sources within and without the Philippines. All other individual income taxpayers are taxable only for income derived from sources within the Philippines. CORPORATIONS WHO A RE T AXABL E? Domestic Corporation – created or organized in the Phils. or under its law [Sec. 22(C), NIRC] 2. Resident Foreign Corporation – engaged in trade or business within the Philippines [Sec. 22(H), NIRC] Non-resident Foreign Corporation – not engaged in trade or business within the Philippines [Sec. 3. 22(I), NIRC] A Corporation Includes: 1. Partnerships, no matter how created or organized; 2. Joint-stock companies; 3. Joint accounts (cuentas en participacion) 4. Associations; or 5. Insurance companies [Sec. 22(B), NIRC]. Excludes: 1.
1. 2.
General professional partnerships; Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government.
CORPORATIONS EXEMPT FROM INCOME T AXATION (FOR INCOME REALIZED AS SUCH) UNDER NIRC
1.
Those enumerated un der Sec. 30. Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income.
2.
With respect to GOCCs, the general rule is that these corporations are taxable as any other corporation except: a. GSIS b. SSS c. PHIC d. PCSO e. PAGCOR [Sec. 27 (C)] Regional or Area Headquarters under Sec. 22 (DD) – not subject to income tax Regional operating headquarters under Sec. 22(EE) shall pay a tax of 10% of their taxable income.
3.
ONLY DOMESTIC CORPORATIONS are taxable for income derived from sources within and without the Philippines. All other corporate income taxpayers are taxable onl y for income derived from sources within the Philippines
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