Income-Tax-Reviewer PDF

o Police Power: The power to enact laws to Module 1 protect the well-being of the people. o Eminent Domain: The power to take Taxation may be defined as a...

o Police Power: The power to enact laws to Module 1 protect the well-being of the people. o Eminent Domain: The power to take Taxation may be defined as a state power, a private property for public use after paying legislative process, and a mode of government cost just compensation. distribution. Similarities of the three inherent powers of the The government's necessity for funding is the State: theory of taxation. o Necessary attributes of sovereignty. o Inherent to the state. Mutuality support between the people and the o Legislative in nature. government is referred to as the basis of taxation. o Interfere with private rights and properties. Theories of Cost Allocation: Taxation is a mode o Exist independently of the Constitution. of allocating government costs or burdens to the o Presuppose an equivalent form of people. When distributing these costs, the compensation. government considers two general considerations: o Exercise by local government units may be the benefit received theory and the ability to pay limited by the national legislature. theory. Scope of Taxation Power: Benefit Received Theory - This theory assumes o Comprehensive: Covers all persons, that the more benefit one receives from the businesses, professions, rights, and government, the more taxes they should pay. For privileges. example, someone who uses public transportation o Unlimited: Power to tax is unlimited and frequently would pay more in taxes than someone comprehensive unless limited by law or the who does not. Constitution. Ability to Pay Theory - This theory assumes that o Plenary: BIR has remedies to ensure tax taxation should consider the taxpayer's ability to collection. pay. This means that people who can afford to pay o Supreme: The government has the more in taxes should do so, even if they don't ultimate authority in selecting the subject of directly benefit from government services. This is to taxation. ensure that the tax system is fair and just, and Limitations of Taxation Power: doesn't disproportionately burden those with less o Inherent limitations: financial capacity. ▪ Territoriality of taxation This theory has two aspects: ▪ International comity Vertical equity: This proposes that a person's ▪ Public purpose ability to pay is directly proportional to their level of ▪ Exemption of the government income or wealth (tax base). For example, ▪ Non-delegation of the taxing power someone with a higher income would be taxed more o Constitutional limitations: than someone with a lower income. (gross concept) ▪ Due process of law Horizontal equity: This requires consideration of ▪ Equal protection of the law the taxpayer's specific circumstances. For example, ▪ Uniformity rule in taxation two people with the same income might have ▪ Progressive system of taxation different expenses, such as medical bills or ▪ Non-imprisonment for non- childcare costs. In this case, the person with fewer payment of debt or poll tax expenses would be taxed more than the person with ▪ Non-impairment of obligation and more expenses, as they have a greater capacity to contract contribute. (net concept) ▪ Free worship rule Taxes are the lifeblood of the government. This ▪ Exemption of religious or charitable means that taxes are essential for the government entities, non-profit cemeteries, to function and provide public services. churches, and mosques from Implication of the lifeblood doctrine: property taxes 1. Tax is imposed even in the absence of a ▪ Non-appropriation of public funds Constitutional grant. or property for the benefit of any 2. Claims for tax exemption are construed against church, sect, or system of religion taxpayers. ▪ Exemption from taxes of the 3. The government reserves the right to choose the revenues and assets of non-profit, objects of taxation. non-stock educational institutions 4. The courts are not allowed to interfere with the ▪ Concurrence of a majority of all collection of taxes. members of Congress for the 5. In income taxation: passage of a law granting tax (a.) Income received in advance is taxable exemption upon receipt. (b.) Deduction for capital expenditures ▪ Non-diversification of tax and prepayments is not allowed as it effectively collections defers the collection of income tax. (c.) A lower ▪ Non-delegation of the power of amount of deduction is preferred when a claimable taxation expense is subject to limit. (d.) A higher tax base is ▪ Non-impairment of the jurisdiction preferred when the tax object has multiple tax bases of the Supreme Court to review tax Inherent Powers of the State: cases o Taxation Power: The power to enforce ▪ The requirement that proportional contribution from its subjects appropriations, revenue, or tariff to sustain itself.  bills shall originate exclusively in o Entering into treaties or bilateral the House of Representatives agreements ▪ The delegation of taxing power to Escapes from Taxation: Means to limit or avoid tax local government units impact. Essential Elements of Tax: Categories of Escapes from Taxation: o Enforced contribution. o Resulting in loss of government o Generally payable in money. revenue: o Proportionate in character. ▪ Tax evasion (tax dodging) o Levied on persons, property, or rights. ▪ Tax avoidance (tax minimization) o Levied by the law-making body of the state. ▪ Tax exemption (tax holiday) o Levied for public purpose. o Not resulting in loss of government Aspects of Taxation: revenue: o Levying or imposition of tax: The ▪ Shifting enactment of a tax law by Congress (impact ▪ Capitalization of taxation). ▪ Transformation o Assessment and collection of tax: Tax Amnesty vs. Tax Condonation: Implementation of the tax law by the o Amnesty covers civil and criminal liabilities, administrative branch (incidence of condonation only civil. taxation). o Amnesty is retrospective, condonation Situs of Taxation: The place of taxation or tax prospective. jurisdiction that has the power to levy taxes. o Amnesty requires partial tax payment, Examples of Situs Rules: condonation doesn't. o Business tax situs o Income tax situs on services o Income tax situs on the sale of goods o Property tax situs Module 2 o Personal tax situs Taxation Law: Any law arising from the State's Other Fundamental Doctrines in Taxation: taxation power. o Marshall Doctrine: "The power to tax Types of Taxation Laws: involves the power to destroy." o Tax laws: Provide for tax assessment and o Holme's Doctrine: "Taxation power is not collection. Examples include: the power to destroy while this Court sits." ▪ National Internal Revenue Code o Prospectivity of tax laws: Tax laws are (NIRC) generally prospective. ▪ Tariff and Customs Code o Non-compensation or set-off: Taxes are ▪ Local Tax Code not subject to automatic set-off. ▪ Real Property Tax Code o Non-assignment of taxes: Tax obligations o Tax exemption laws: Grant immunity from cannot be transferred. taxation. Examples include: o Imprescriptibility in taxation: The ▪ Minimum Wage Law government's right to collect taxes does not ▪ Omnibus Investment Code of 1987 prescribe unless specified by law. ▪ Barangay Micro-Business o Doctrine of estoppel: The government is Enterprise (BMBE) Law not subject to estoppel. ▪ Cooperative Development Act o Judicial Non-interference: Courts cannot Sources of Taxation Laws: generally issue injunctions against tax o Constitution collection. o Statutes and Presidential Decrees o Strict Construction of Tax Laws: Vague o Judicial Decisions (case laws) tax laws are construed against the o Executive Orders and Batas Pambansa government, while vague tax exemption o Administrative Issuances laws are construed against the taxpayer. o Local Ordinances Double Taxation: Occurs when the same taxpayer o Tax Treaties and Conventions is taxed twice by the same jurisdiction for the same o Revenue Regulations thing. Types of Administrative Issuances: Elements of Double Taxation: o Revenue regulations o Primary element: Same object o Revenue memorandum orders (RMOs) o Secondary elements: o Revenue memorandum rulings (RMRs) ▪ Same type of tax o Revenue memorandum circulars (RMCs) ▪ Same purpose of tax o Revenue bulletins (RBs) ▪ Same taxing jurisdiction o BIR rulings ▪ Same tax period Types of rulings Types of Double Taxation: 1. Value Added Tax (VAT) rulings o Direct double taxation: All elements of 2. International Tax Affairs Division (ITAD) rulings double taxation are present. 3. BIR rulings o Indirect double taxation: At least one 4. Delegated Authority (DA) rulings secondary element is not common. Revenue Regulations: Ways to Minimize Double Taxation: o Issuances clarifying or explaining the tax o Provision of tax exemption law and providing implementation details. o Allowing foreign tax credit o Allowing reciprocal tax treatment  o Have the force and effect of law but should o According to Impact: not expand or limit the law's application. ▪ Progressive system: Emphasizes GAAP vs. Tax Laws: direct taxes. o GAAP are conventions for financial ▪ Regressive system: Emphasizes reporting, while tax laws prescribe criteria indirect taxes. for tax reporting. Tax Collection Systems: o Taxpayers follow GAAP in their books but o Withholding system on income tax: must follow tax law in case of conflict when Payor withholds tax before releasing filing tax returns. income. Nature of Philippine Tax Laws: Civil, not political ▪ Creditable withholding tax: or penal. ▪ Withholding tax on Tax: Enforced proportional contribution levied to compensation raise revenue for public purpose. ▪ Expanded withholding tax Elements of a Valid Tax: ▪ Final withholding tax: Full tax o Levied by the taxing power with jurisdiction. deducted on certain income o Doesn't violate Constitutional and inherent payments. limitations. o Withholding system on business tax: o Uniform and equitable. Withholding of business tax (VAT or o For public purpose. percentage tax) on purchases by o Proportional. government agencies. o Generally payable in money. o Voluntary compliance system (Self- Classification of Taxes: assessment method): Taxpayer o As to purpose: determines income, reports it, and pays ▪ Fiscal or revenue tax tax. ▪ Regulatory o Assessment or enforcement system: ▪ Sumptuary Government identifies non-compliant o As to subject matter: taxpayers, assesses tax dues, and ▪ Personal, poll, or capitation enforces collection. ▪ Property tax Principles of a Sound Tax System: ▪ Excise or privilege tax o Fiscal adequacy: Sufficient funds to cover o As to incidence: government costs. ▪ Direct tax o Theoretical justice (equity): Taxation ▪ Indirect tax considers taxpayer's ability to pay. o As to amount: o Administrative feasibility: Tax laws are ▪ Specific tax capable of efficient administration. ▪ Ad valorem Tax Administration: Management of the tax o As to rate: system, entrusted to the Bureau of Internal ▪ Proportional tax Revenue (BIR) for the national tax system. ▪ Progressive or graduated tax Chief Officials of the Bureau of Internal Revenue ▪ Regressive tax 1. 1 Commissioner ▪ Mixed tax 2. 4 Deputy Commissioners, each to be designated o As to imposing authority: to the following: (a.) Operations group (b.) Legal ▪ National tax Enforcement group (c.) Information Systems Group ▪ Local tax d. Resource Management Group Tax Distinguished from Other Imposts: Powers of the BIR: o Toll: Payment for the use of something, like o Assessment and collection of taxes. a road or bridge. o Enforcement of forfeitures, penalties, fines, o Penalty: Sanction for violating the law. and judgments. o Special Assessment: Levy on land for o Supervisory and police powers. special benefits from public improvements. o Assignment of officers and employees. o Revenue: All funds from taxes and other o Provision and distribution of forms, sources. receipts, etc. o Subsidy: Pecuniary aid from the o Issuance of receipts and clearances. government. o Submission of reports. o Permit or License Fee: Charge for Powers of the CIR: regulation. o Interpret NIRC provisions (subject to o Debt: Based on contract, while tax is based review). on law. o Decide tax cases (subject to CTA's o Custom Duties: Taxes on imports and jurisdiction). exports. o Obtain information and summon, examine, o Tariff: Can refer to a book of rates, duties and take testimony. payable, or the system of imposing duties. o Make assessments and prescribe Tax System: Methods or schemes for imposing, additional requirements. assessing, and collecting taxes. o Examine tax returns and determine tax Types of Tax Systems: due. o According to Imposition: o Conduct inventory taking or surveillance. ▪ Progressive o Prescribe presumptive gross sales and ▪ Proportional receipts. ▪ Regressive o Terminate tax period.  o Prescribe real property values. Overseas Contract Worker (OCW)/Overseas o Compromise tax liabilities. Filipino Worker (OFW): Filipino citizens employed o Inquire into bank deposits (limited in foreign countries, registered with POEA and circumstances). holding a valid OEC. Classified as nonresident o Accredit and register tax agents. citizens for tax purposes. o Refund or credit taxes. Resident Citizen: A Filipino citizen not classified as o Abate or cancel tax liabilities. a nonresident citizen. o Prescribe additional procedures or Alien: A foreign-born person not qualified for requirements. Philippine citizenship. o Delegate powers (except non-delegated Resident Alien: An individual residing in the powers). Philippines but not a citizen. Non-delegated powers of the CIR: Non-resident Alien: An individual whose residence o Recommend the promulgation of rules and is not in the Philippines and who is not a citizen. regulations. o NRA-ETB: Aliens who stayed in the o Issue rulings of first impression or reverse, Philippines for over 180 days or have revoke, or modify rulings. business income. o Compromise or abate tax liability (except o NRA-NETB: Aliens staying for 180 days or for specific cases handled by Regional less or not deriving business income. Evaluation Boards). Subject to 25% tax on gross income from o Assign revenue officers to establishments Philippine sources (except for capital with excisable articles. gains). Criteria for Large Taxpayers: Based on payments Factors Determining Applicable Taxes for of VAT, excise tax, income tax, withholding tax, Individuals: percentage tax, documentary stamp tax, or financial o Classification of taxpayer conditions like gross receipts/sales, net worth, and o Source of income gross purchases. o Type of income New Taxpayer Classification (EOPT): Tax Base and Source of Taxable Income: o Micro: Gross sales less than P3,000,000. o RC: Net income from within and without the o Small: Gross sales P3,000,000 to less than Philippines P20,000,000. o NRC, RA, NRA-ETB: Net income from o Medium: Gross sales P20,000,000 to less within the Philippines than P1,000,000,000. o NRA-NETB: Gross income from within the o Large: Gross sales P1,000,000,000 and Philippines above. Types of Income (Applicable Tax): o Ordinary/Regular Income: Subject to graduated tax rates. Module 3 o Passive Income: Subject to final withholding taxes. Individual Taxpayers: Natural persons with o Capital Gains: Subject to capital gains tax. income from within the Philippines. Income Tax Rates for Individuals (Graduated Classifications of Individual Taxpayers: Rates): o Resident Citizens (RC) Self-Employed and/or Professionals (SEP): o Nonresident Citizens (NRC) o Self-Employed Individual: Sole proprietor o Resident Aliens (RA) or independent contractor. o Nonresident Aliens (NRA) o Professional Individual: Certified by a ▪ Engaged in Trade/Business (NRA- professional body. ETB) Tax Rules for SEPs: ▪ Not Engaged in Trade/Business o Gross sales/receipts ≤ P3,000,000: (NRA-NETB) Option to use graduated rates or 8% tax on ▪ Employed by POGOs and/or OGLs gross sales/receipts exceeding P250,000. Citizens of the Philippines: o Gross sales/receipts > P3,000,000: o Citizens at the time of the 1987 Constitution Subject to graduated rates. adoption. Requisites to Avail the 8% Preferential Rate: o Born with a Filipino father and/or mother. o Gross sales/receipts ≤ P3,000,000. o Born before January 17, 1973, to a Filipino o Non-VAT registered. mother who elects Philippine citizenship o Sales/receipts not VAT-exempt. upon maturity. o Not subject to Percentage Tax (other than o Naturalized citizens. Section 116). Non-resident Citizen: A citizen who: o SEP elects the 8% income tax. o Establishes physical presence abroad with Basis for the P3,000,000 VAT Threshold: an intention to reside there. o Prior to EOPT: Gross sales for goods, gross o Leaves to reside abroad as an immigrant, receipts for services. for permanent employment, or work o After EOPT: Gross sales (total revenue net requiring physical presence abroad most of of VAT) for both goods and services. the time. Irrevocability of 8% Preferential Tax Election: o Stays outside the Philippines for 183 days Once elected in the 1st quarter return, it cannot be or more. changed for the entire year.  SEP's Gross Sales/Receipts Exceeding VAT o Small: Gross sales P3,000,000 to less than Threshold: P20,000,000. o Automatic subjection to graduated rates. o Medium: Gross sales P20,000,000 to less o Income tax credit for quarterly payments at than P1,000,000,000. 8%. o Large: Gross sales P1,000,000,000 and o Liable for business taxes in addition to above. income tax. Purpose of EOPT Grouping: Responsive tax o Required to update registration from non- administration and tax concessions for micro and VAT to VAT. small taxpayers. o Percentage tax (Section 116) imposed until Taxation of Alien Individuals Employed by VAT liability arises. POGOs/OGLs: Subject to 25% FWT on gross o VAT imposed prospectively on the excess income, regardless of residency and work of the threshold. permit/visa. Passive Income: Earned by allowing others to use Filing of Income Tax Returns (ITR) and Payment one's rights or from games of chance/investments. (RR 4-2024): Subject to final tax and not included in taxable Place of Filing and Payment: income for graduated rates. Mode of Filing and Payment: Electronic filing and Types of Passive Income: payment are preferred, but manual options are o Interest income available. o Dividend income When to File and Pay: o Royalties o Purely compensation income: Annually, on o Prizes or before April 15. o Other winnings o Business and/or mixed income: Quarterly Final Withholding Taxes: Taxes on certain income and annually. from Philippine sources. BIR Forms: Final Withholding Tax Rates: o BIR Form 1700: For purely compensation o Interest income (varies based on source) income. o Royalties (varies based on type) o BIR Form 1701: For business/profession o Prizes exceeding P10,000 income. o Other winnings (20% under CREATE Act) o BIR Form 1701A: For purely o Cash and/or property dividends business/profession income with OSD or Capital Gains Tax (CGT): Applies to income from 8% tax rate. the sale of capital assets, specifically shares of o BIR Form 1701Q: Quarterly return for those stocks not listed in the local stock exchange and with business/profession income. real properties in the Philippines. Individuals Required to File ITR: Ordinary Asset vs. Capital Asset: Individuals Not Required to File ITR (EOPT; RR o Ordinary Assets: Stock in trade, 4-2024): depreciable property used in business, real Fringe Benefit Tax (FBT): Filed and paid quarterly property held for sale, and real property using BIR Form 1603Q. used in trade. Final Withholding Tax (FWT) on Passive o Capital Assets: All other property not Income: Filed and paid quarterly using BIR Forms classified as ordinary assets. 1601-FQ and 1602Q. Gains from Sale: Capital Gains Tax: o Ordinary assets: Subject to basic income o Shares of stock: BIR Form 1707 (ordinary tax (graduated rates). return within 30 days, final consolidated o Capital assets: return by April 15). ▪ 15% CGT on sale of shares of o Real property: BIR Form 1706 (within 30 stocks not traded in the local stock days, installment payments reported within exchange. 30 days). ▪ 6% CGT on sale of real property in Minimum Wage Earners (MWEs): Exempt from the Philippines. income tax on minimum wage, holiday pay, Sale of Real Property to the Government: overtime pay, night shift differential, and hazard pay. Taxpayer can choose between 6% CGT or Substituted Filing of ITR: Eligible if receiving graduated rates. purely compensation income with correct Sale of Principal Residence: Exempt from CGT withholding, from one employer, and spouse meets under certain conditions. same conditions or has no income. Principal Residence: Family home of the taxpayer. Requisites for Tax Exemption on Sale of Principal Residence: o Proceeds fully utilized for a new principal residence within 18 months. o Historical cost carried over to the new residence. o BIR notified within 30 days of the sale. o Exemption availed only once every 10 years. Taxpayer Classification under EOPT (All Types of Taxpayers): o Micro: Gross sales less than P3,000,000.