Nature or Construction of Tax Laws Sources of Tax Laws
1. Tax laws are prospective, generally, but can 1. 1987 Constitution
have retrospective application. 2. NIRC, Tariff and Customs Code, VAT Law, - Prospective operation unless the purpose and Revised DST, Amended Excise Tax Law, and intention of the legislature to give retrospective portions of the Local Government Code effect is expressly declared or necessarily 3. Executive orders and local tax ordinances implied from the language used 4. Tax treaties and conventions - Tax laws are NOT penal in character. Being 5. Judicial decisions civil, the constitutional prohibitions against the 6. Rules and regulations promogulated by the passage of ex post factor legislation does NOT Department of Finance, BIR, Bureau of apply to tax laws Customs, etc. - It is one's civil liability to pay taxes that gives 7. Administrative interpretations and opinions of rise to criminal liability tax officials particularly of those of the Commissioner of Internal Revenue 2. A statue will NOT be construed as imposing a tax unless it does so clearly, and ambiguously Special Assessment - A tax CANNOT be imposed without clear and express words for that purpose - nature of a tax upon properly levied according - In case of doubt, statutes imposing a tax are to benefits conferred to the property construed most strongly against the government, and liberally in favor of the Characteristics of a Special Assessment citizen 1. A special assessment can be levied only on LAND 3. Tax exemptions are to be construed against 2. A special assessment CANNOT be made a the taxpayer personal liability of the person assessed 3. A special assessment is based wholly on 4. Revenue laws are NOT political in nature benefits 4. A special assessment is exceptional BOTH as 5. Legislative intention must be considered to time and locality
6. Tax laws are special laws, and prevail over
general law TAX SPECIAL ASSESSMENT
Imposed on ALL Imposed only on
Forms of Escape from Taxation property in prescribed property which benefit 1. Shifting the burden if the tax area from the improvement 2. Capitalization - by not selling property which has increased in value, the owner avoids the Tax and License Distinguished income tax to be paid on the gain if the same is sold 3. Transformation - recoup the tax paid by TAX LICENSE making his production more efficient and Purpose To raise To regulate lowering his cost of production revenue action, 4. Tax Exemption - freedom from the burden of businesses, paying tax industries, 5. Tax Avoidance - minimize taxes are legal and professions NOT prohibited by law 6. Tax Evasion - fraud Limitations on Subject to NOT subject to Taxation constitutional the limitations on and inherent taxation limitations Tax Administrator unlimited - System of involving assessment, collection and Amount Unlimited Limited to the enforcement of taxes, including the execution cost of regulation of judgement in all tax cases decided in favor Effect of Does NOT Makes the of the BIR by the courts Non-Payment make the business business illegal ILLEGAL Powers and Duties of the Bureau of Internal Revenue (BIR)
Tax and Toll Distinguished 1. Assessment and collection of all national
internal revenue taxes, fees, and charges 2. The enforcement of all forfeitures, penalties, TAX TOLL and fines connected therewith - Demand for - Demand of ownership or 3. The execution of judgement in all cases sovereignty proprietorship decided in favor by the CTA and the ordinary - Imposed by the - May be imposed by private courts government person or entities 4. The giving effect to and the administering of - May be based on - Largely based on the cost of the supervisory and police power conferred to income or the value the property used or on the it by the Tax Code or other laws of the property cost of the improvement used - Forced - Compensation charged by Powers of the Commissioner of Internal Revenue contribution the owner for the voluntary use (CIR) of the property/improvements 1. Power to interpret tax laws subject to review by the Secretary of Finance Tax and Debt Distinguished 2. Power to decide disputed assessments, refunds of internal revenue taxes, fees and TAX DEBT other charges, penalties imposed . 3. Power to examine any book, paper, record, or Source of Law Contract other data which may be relevant or material to Obligation Due to the gov't Due to oblige under a tax inquiry Obligee in its sovereign a contract 4. Power to obtain information from any person capacity other than the person whose internal revenue tax liability is subject to audit Form of Money Money, Property or 5. Power to summon such the person liable for Payment Services tax or required to file a return 6. Power to take such testimony of the person Interest NO interest If stipulated or if the concerned, under oath, as may be relevant or except in cases payment is in delay material to such inquiry of delinquency 7. Power to make assessment 8. Power to prescribe real property values by Assignability NOT Generally dividing the country into different zones and assignable assignable determining the FMV of real properties located Compensation No Yes to each zone /Set off 9. The Commissioner is authorized to inquire int the bank deposits and other related information Incarceration Yes, except for No person can be held by financial institution of: for Non- non-payment of imprisoned for a) A decedent to determine his gross Payment poll tax non-payment of estate debts b) A taxpayer who has filed an application ● Shareholder: A person holding shares of for compromise of his tax liability by stock, warrants, or options in a corporation or reason of financial incapacity to pat his partnerships. tax liability ● Taxpayer: Anyone required to pay tax. c) A taxpayer who is subject of a request ● Including/Includes: Means that other items for the supply of information from a can also fall under the definition. foreign tax authority pursuant to an ● Taxable Year: The calendar or fiscal year used international agreement or treaty to calculate net income. 10. The Commissioner has the authority to ● Fiscal Year: A 12-month accounting period accredit and register individuals and GPP and ending on a month other than December. their representatives who prepare and file tax ● Paid or Incurred/Paid or Accrued: Relates to returns, statements, report and other papers how expenses are recorded in accounting. 11. Power to prescribe additional procedural or ● Trade or Business: Includes public office documentary requirements in connection with functions. the submission or preparation of financial ● Securities: Stocks, bonds, and other forms of statements accompanying the tax returns debt. ● Dealer in Securities: A person or entity that Definitions buys and sells securities as a business. ● Bank: Any institution defined under the ● Person: An individual , trust, estate, or General Banking Act. corporation. ● Non-Bank Financial Intermediary: A financial ● Corporation: Includes partnerships, joint-stock institution authorized to perform certain companies, associations, and insurance financial activities companies, but excludes general professional ● Quasi-Banking Activities: Borrowing from partnerships and certain construction ventures. many lenders and other similar financial ● Domestic Corporation: A corporation formed activities. under Philippine laws. ● Deposit Substitutes: Alternative ways to ● Foreign Corporation: A corporation not obtain funds, excluding traditional deposits. formed under Philippine laws. Philippines ● Ordinary Income: Income from selling during the tax year to live abroad. non-capital assets. ● Nonresident Citizen: A Filipino citizen living ● Rank and File Employees: Employees who abroad with the intention to stay there, or are not in management or supervisory roles. someone who leaves the ● Mutual Fund Company: A company ● Resident Alien: A person living in the managing mutual funds as defined by law. Philippines who is not a Filipino citizen. ● Trade, Business, or Profession: Does not ● Nonresident Alien: A person not living in the include services performed as an employee. Philippines and not a Filipino citizen. ● Regional or Area Headquarters: Branches of ● Resident Foreign Corporation: A foreign multinational companies in the Philippines that corporation doing business in the Philippines. do not earm income there. ● Nonresident Foreign Corporation: A foreign ● Regional Operating Headquarters: Branches corporation not doing business in the of multinational companies providing specific Philippines. services in the Philippines. ● Fiduciary: A person acting in a trust or ● Long-Term Deposit or Investment responsibility role, such as a guardian or Certificate: Investments with a maturity of at trustee. least five years issued by banks. ● Withholding Agent: A person required to ● Statutory Minimum Wage: The minimum withhold tax. wage set by a government board. ● Shares of Stock: Includes stocks, warrants, ● Minimum Wage Earner: A worker earning the options, and participation units in partnerships minimum wage in the private sector or a and various organizations. low-paid public sector employee. SEC. 23. General Principles of Income Taxation 3. Special Cases: 1. Married Individuals: Tax is calculated 1. Filipino Citizens: Citizens living in the separately for each spouse. Philippines are taxed on all their 2. Minimum Wage Earners: Exempt from income, whether earned inside or income tax, including certain allowances like outside the country. holiday pay. 2. Nonresident Citizens: Citizens living 3. Self-Employed Individuals: Can opt for an abroad are only taxed on income 8% tax on income exceeding P250,000 instead earned within the Philippines. of graduated rates. 3. Overseas Contract Workers: Filipino 4. Mixed Income Earners: Taxed on citizens working abroad are taxed only compensation and business income on income from Philippine sources. separately. However, Filipino seamen working on ships involved in international trade are 4. Passive Income Tax Rates: treated as overseas contract workers 1. Interest and Royalties: Generally taxed at and taxed similarly. 20%; lower rates apply to royalties on books 4. Aliens (Foreigners): Foreign and music. individuals, regardless of residency, are 2. Cash Dividends: Taxed at 10%. taxed only on income earned within the 3. Capital Gains from Stocks: Taxed at 15% for Philippines. stocks not traded on exchanges. 5. Domestic Corporations: Corporations 4. Real Property Gains: Taxed at 6% on the based in the Philippines are taxed on selling price or fair market value. all their income, both domestic and foreign. SEC. 25. Tax on Nonresident Alien Individuals 6. Foreign Corporations: Foreign corporations are taxed only on income 1. Nonresident Aliens Engaged in Business: earned from sources within the Taxed like Filipino citizens on income from Philippines, regardless of whether they Philippine sources. If staying over 180 days, conduct business in the country. considered doing business in the Philippines. 2. Nonresident Aliens Not Engaged in SEC. 24. Income Tax Rates for Individuals Business: Taxed at 25% on income from Philippine sources, with specific lower rates for 1. Who is Taxed: certain types of income. 1. Filipino Citizens: Taxed on all income earned 3. Employees of Multinational Companies and inside and outside the Philippines Offshore Banks: Taxed at 15% on gross 2. Nonresident Citizens: Taxed only on income income. earned within the Philippines. 3. Resident Aliens: Taxed only on income SEC. 26. General Professional Partnerships earned within the Philippines. ● Partnerships are not taxed as entities. Partners 2. Tax Rates (Effective January 1, 2023): pay tax individually on their share of 1. Income up to P250,000: 0% tax partnership income, which is calculated like a 2. P250,001 to P400,000: 15% on the amount corporation. over P250,000 Tax Evasion 3. P400,001 to P800,000: P22,500 plus 20% on the amount over P400,000 ➢ Financial criminal has obtained their illicit 4. P800,001 to P2,000,000: P102,500 plus 25% proceeds they're very unlikely to pay taxes on on the amount over P800,000 them. 5. P2,000,001 to P8,000,000: P402,500 plus ➢ Tax evasion is a factor in almost all financial 30% on the amount over P2,000,000 crimes. 6. Over P8,000,000: P2,202,500 plus 35% on the amount over P8,000,000 The BIR is charged, among other things, with the Various Tax Audit Triggers and Exposures responsibility of investigating and prosecuting tax evaders, in line with the directive to go after big-time (1) Significant fluctuations in assessable profits tax evaders under the Run After Tax Evaders (RATE) without corresponding fluctuations in tax Program. liabilities (2) Huge and consistent loss situations Tax Audit Vs. Tax Investigation (3) Significant refund claims with respect to withholding tax and value added tax ● Tax Audit - This is a process of examining a (4) Significant related party transactions which taxpayer's record and documents in order to might seem to the tax authority as profit ascertain whether such taxpayer has shifting appropriately assessed, reported and remitted (5) Significant expense to revenue ratio. its tax liability for the relevant year of assessment. The five types of evidence that can be ● Tax Investigation - Can be described as an accumulated in a fraud investigation advancement from tax audit, it entails a more detailed examination by the tax authority in (1) Testimonial evidence - Which is gathered order to recover under charged tax in previous from individuals. years due to an information/ suspicion that the (2) Documentary evidence - Which is gathered taxpayer might have evaded tax. from paper, computers, and other written or printed sources. Difference Between Tax Audit & Tax Investigation (3) Physical evidence - includes fingerprints, tire marks, weapons, stolen property, identification Item Tax Audit Tax Investigation numbers or marks on stolen objects, and other tangible evidence that can be associated with dishonest acts. Objective Ascertaining To recover (4) Personal observation - involves evidence that the correctness undercharged tax in is sensed (seen, heard, felt, etc.) by the of tax liability previous years investigators themselves. (5) Analytical evidence - includes computations, comparisons, reasoning, and separation of Nature Tax Audits are Tax Investigation information into components. routine in are targeted nature Standards of Audit Evidence
➢ Sufficiency (evidence is convincing)
Duration Tax Audits are Tax Investigation ➢ Competence (evidence is reliable) usually can go farther than ➢ Relevance (evidence is logical) short-term 6 years Legal Evidence Results Tax Audits Tax investigation ➢ Best Evidence (the most satisfactory proof of would lead to would result in the fact and provides primary evidence), additional either an ➢ Secondary Evidence (inferior to primary assessment or assessment or evidence and cannot be relied upon). a refund criminal ➢ Direct Evidence (no presumptions or prosecution inferences are required). ➢ Circumstantial evidence (does not directly Triggers Tax Audits are Intelligence reports. prove the existence of the primary fact) statutory publications, ➢ Conclusive evidence (only one conclusion industry average, can be drawn and needs no corroboration). fraud... etc. ➢ Corroborative evidence (Additional evidence of a different character). ➢ Opinion evidence (based on seeing or ● Data Files in CD-ROM, with pre-defined hearing and expert opinion is permitted). headings/columns ➢ Hearsay evidence (secondhand evidence; not ● Payroll slips/other records/ documents as may admissible). be deemed necessary
ACCOUNTING RECORDS FOR INTERNAL Description of Offense
REVENUE TAXES (1) Willfully attempting to evade or defeat any tax ● Books of Accounts and other related imposed by taxing authorities or failure to pay accounting records such tas ● Summary list of Purchases and Input Tax (2) Willfully failing to collect or remit tax ● Purchase Invoices and Receipts (3) Willfully failing to file a return, supply ● Check Vouchers information, maintain records, or pay tas ● Cancelled (Paid) Checks (4) Furnishing a fraudulent statement or failing to ● Bank Statements furnish a withholding statement to employee ● Summary List of Sales and Output Tax (5) An employee's furnishing false or fraudulent ● Sales Invoices and Receipts information related to income tax withholding ● Inventory List (beginning and ending) (6) Furnishing a false or fraudulent taxpayer ● Annual ITR/ Quarterly ITR and Proof of identification number to banks or other payers Payments including Audited Financial of interest and dividends. Statements (7) Making a false statement on any return or ● BIR Form 2307- Certificate of Creditable Tax document that contains a declaration that the withheld at Source contents are correct when the signatory does ● BIR Form 1601E, 1601C, 1604E and 1604CF not believe this to be true (returns & payments) (8) Aiding or advising the preparation of a return, ● Alphabetical list of employees/ Payees from claim, or other document that is false as to a whom taxes were withheld material matter. ● Schedule of income payments not subjected to (9) Attempting to place assets beyond the reach of withholding tax the tax authorities with intent to evade or ● Monthly/Quarterly VAT or Percentage Tax defeat the assessment or collection of any returns income tax. ● Schedule of taxes and licenses, (10) Concealing property or withholding, depreciation and income producing falsifying, or destroying records related to the properties financial position of the taxpayer in connection ● Proof and schedule of Interest Expenses and with an offer-in-compromise (or a closing Various Promissory Notes agreement made with the tax authorities as to ● Working papers of the monthly debit and credit the assessment of tax due) balances of all accounts (11) Delivering fraudulent returns, statements, ● Lease Contract and proof of DST payment or other documents thereon (if applicable) (12) Attempting to interfere with internal ● Proof of DST payment on the issuance of revenue laws or threatening to intimidate or subscribed capital stock (if applicable) impede officers or employees of the tax ● Proof of Deposit from stockholders (if authorities. applicable) (13) Failing to collect, account for truthfully, or ● Summary Details of Accounts Payable with remit taxes held in trust or failing to make, name of payees (if applicable) deposits, payments, or file returns relating to ● Summary Details of Account Receivable with taxes held in trust. the name of customers (if applicable) (14) Willfully falsifying, concealing, or covering ● SEC Registration, Articles of Incorporation and up information or making any materially false, By-Laws or DTI/ Mayors Permiit/ COR fictitious, or fraudulent statement. (whichever is applicable) (15) Underpaying tax due to negligence (16) Underpaying tax due to fraud (17) Fraudulently failing to file a return Elements of Tax Evasion (18) Providing fraudulent statement or failing to provide statement to employees. a) Payment of an amount of tax less than what is known by the taxpayer to be legally due. TAX AUDIT PROCESS b) An accompanying state of mind which is evil, in bad faith, deliberate, willful or intentional, and (1) Case Selection not merely incidental; and (2) Notification of Tax Audit c) A cause of action or failure of action which is (3) Field Exercise unlawful. (4) Tax Audit Report (5) Reconciliation Meetings TAX EVASION VS. TAX AVOIDANCE VS. TAX (6) Assessments, Objections and if necessary, EXEMPTION Appeals (7) Payment of established liabilities and if ❖ Tax avoidance - (Also referred to as tax possible, refund of excess tax minimization scheme) It is the reduction or totally escaping payment of taxes through TAX EVASION VS. TAX AVOIDANCE VS. TAX legally permissible means, that are not EXEMPTION prohibited and therefore are not subject to penalties. ❖ Tax evasion - (Also referred to as Tax dodging) It is resorting to acts and devices Tax Avoidance that illegally reduces or totally escape the payment of taxes that are due to the taxpayers. Tax avoidance is the legal use of tax laws to reduce They are prohibited and therefore are subject one's tax liability. This involves planning and to civil and/or criminal penalties. strategizing financial affairs within the boundaries of the law. Tax Evasion Examples: Tax evasion refers to the illegal act of not paying taxes owed through deceitful means, such as underreporting 1. Utilizing Tax Deductions: A self-employed income or falsifying information. individual deducts legitimate business expenses such as office supplies and utilities Examples: from their taxable income. By doing so, they lower their overall tax liability, complying with 1. Underreporting Sales: A small business tax laws. owner reports only a fraction of their actual 2. Investing in Tax Incentives: A corporation sales to the Bureau of Internal Revenue invests in a Special Economic Zone, which (BMR). For example, if the actual sales are may offer tax holidays or reduced tax rates. PHP 2 million but only PHP 1 million is This strategic investment reduces their reported, the business avoids paying taxes on corporate income tax liability legally. the unreported income. 3. Using Tax Credits: A taxpayer takes 2. Fake Invoices: A taxpayer creates fake advantage of tax credits available for invoices to claim nonexistent expenses. For educational expenses or investments in instance, a company generates fake receipts renewable energy. For instance, the for services that were never rendered, allowing government offers tax credits for donations to them to reduce their taxable income charitable institutions, which can reduce the fraudulently. total tax owed. 3. Non-Filing of Tax Returns: An individual or business fails to file their tax returns altogether, TAX EVASION VS. TAX AVOIDANCE VS. TAX thereby not reporting any income or paying any EXEMPTION taxes. This is a common form of tax evasion where taxpayers simply ignore their tax ❖ Tax exemption - It is an immunity, privilege, or obligations. freedom from payment of a charge or burden to which others are obliged to pay. Tax Exemption (l) Use of Fake Certificate Authorizing Registration (CAR), Tax Clearance Certificate Tax exemption refers to specific income, (TCC) or other accountable forms. organizations, or transactions that are excluded from (m)Failure to register with the BIR tax liability under Philippine tax laws.
Examples:
1. Non-Profit Organizations: Charitable
organizations registered under the Philippine Council for Non- Non-Government Organizations (PCNC) are exempt from income tax on funds used for charitable purposes. This encourages contributions to social causes. 2. Minimum Wage Earners: Individuals earning below the minimum wage are exempt from paying income tax. This exemption helps support low-income earners and ensures that they have more disposable income. 3. Retirement Benefits: Certain retirement benefits under the Social Security System (SSS) and other retirement plans may be exempt from income tax when received by the retiree. This exemption is designed to provide financial security for retirees.
SOME COMMON TAX FRAUD SCHEMES
(a) Deliberately underreporting or omitting income
➔ Deliberate under declaration of income by more than 30% of that declared per return ➔ Substantial under declaration (b) Overstating tax deductions ➔ Deliberate overstatement of amount of deductions by more than 30% of actual deductions ➔ Substantial overstatement of deductions (c) Keeping more than one (1) set of books of accounts (d) Making false entries in books and records (e) Claiming personal expenses as business expenses (f) Claiming false deductions (g) Hiding or transferring assets or income (h) Illegal money laundering schemes (i) Failure to file tax returns (j) Failure to pay taxes (k) Non-remittance of withholding taxes