a — ternal Revenue and Onions by i 4. Rulings issued by the Commissioner of Secretary of Justice; als; 5, Decisions of the Supreme Court and the Court of T9X Ape’ ver ‘The “rational basis test” is applied t© gauge the ok i ah 2esaeg lay 2 ye. It has IN are in the face of an equal protection challeng' havnather orion 7 jassification social and economic policy, a statutory © be upheld again nstitutional rights must De UP te Sgain cat prectanlr eth yceivable state of facts the " if there is any reasonably con e ate protection challenge as classification.” ‘Under this test, itis sufficient tha provide a rational basis legislative classification is interest (British American Tobacco v5. J05e wing some legitima mally elated to achie oa ee So Camacho, e 0, GR. 163555 8 Ao 15, 2003). de 6. Provincial, cy, municipal, and barangay ordinances subject limitations set fog, inthe Local Government Code; and pose of which is t© avoid oF min ing 7. Treaties or international agreements the Pu double taxation. Republic Act 9282 iction of the Court of Tax Appeals (CTA). This law RA, 9282 expanded the juris Jed RA. 1125-the law creating the CTA. Some soins effect on Apr. 22, 2004. It amen features of R.A. 9282 follow: hall be ofthe same level as the Court of Appeals (CA). ing justice and five associate justices. For en bane jtute a quorum. The affirmative vote of fou + ThecTAst «It shall be composed of a presidit sessions, four justices shall consti members shall be necessary to render a decision or resolution. here shall be two divisions (with three members each); the chairmen shall be the presiding justice and the mast senior associate. Two justices constitute @ quorum f erssons of a division n order to render a decsion/resolution, the affirmative veg of two members of a division is necessary. The CTA has exclusive original jurisdiction over all criminal offenses arising tro Violations of the NIRC and other laws administered by the BIR where the prinpa Snountof taxes and fees exclusive of charges and penalties) claimed is PA milion ang " Equal protection is a constitutional guarantee which means that no person or class of = no person or da of esos stl be Sitter a ine ot et cane Greursones tees ber pope, nde rst happnes. Eulprtecton wih teen cnfnon tan ops ot ese bo aon ere not eed ee ia een roe eat pew aeons nt irr eee Gere ference in classification, as to be wholly arbitrary (Waiters vs City of St. Lout i US. Supreme Court Reporter S05, 509, 98 Lawyer's Edition 660). mi a 2above. For the same amount of claim, the CTA has exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties. The CTA has the exclusive jurisdiction to review on appeal decisions of the Commissioner of Internal Revenue (CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, or other matters. In case of inaction by the BIR where the NIRC provides a specific period of action, the inaction shall be deemed a denial and the CTA has the jurisdiction to review the same. The Supreme Court has ruled that while the Revised Rules of the CTA confers on the CTA Jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a law or rule is challenged (British American Tobacco vs. Jose Isidro Camacho, et. al, G.R. 163583). The regular courts have jurisdiction to pass upon the validity of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi legislative function. Interpretation and Construction of Tax Statutes ‘The recognized rules in statutory construction also apply to tax statutes. As in other statutes, the legislative intent is the primary concern. However, where there is doubt in determining the legislative intent, the doubt must be resolved liberally in favor of taxpayers and strictly against the taxing authority. Exemptions in taxation are highly disfavored in law; they are not to be presumed nor implied but must be clearly expressed. A tax exemption, when granted, shall be strictly construed against the grantee. Thus, he who claims the tax exemption must be able to justify his claim or right. As decided by the Supreme Court: “The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions and that he who would seek to be, thus, privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.” (Commissioner of internal Revenue vs. J. Kiener Company, Ltd,, 65 SCRA 143) Philippine Tax Laws and Taxes 1, National Internal Revenue Code of 1997 (P.D. 1158, as amended); income taxes (individual and corporate); estate and donor's taxes; value-added tax; other percentage taxes; excise tax; and documentary stamp tax. peange B2. Tariff and Customs Code of 1978 (P.0. 1464, as amended); a, import duties; and b. export duties, 3. Local Government Code of 1991 (RA. 7160); real property tax; business taxes, fees and charges; Professional tax; community tax; and tax on banks and other financial institutions. eaoge 4. Special Laws a. Motor Vehicle Law (R.A. 4136) - motor vehicle fees; ». Private Motor Vehicle Tax Law (P.O, 1958) ~ private motor vehicle tay, © Philippine immigration Act of 1940 (C.A. 613, as amended) ~ immigration and 4d. Travel Tax Law (P.D. 1183, as amended) - travel tax. ‘Tax Laws Versus GAAP and GAAS- All returns required to be filed by the Tax Code shall be prepared always in with the provisions of the Tax Code, and the rules and regulations issued im, said Tax Code. Taxability of income and deductibility of expenses shall be strictly in accordance with the provisions of the Tax Code and the rules and regulate issued implementing the said Tax Code, In case of difference between the Provisi a the Tax Code and the rules and regulations implementing the Tax Code, on one hart and the generally accepted accounting principles (GAAP) and the generally acceptey auaiting standards (GAAS) on the other hand, the provisions of the Tax Code arc f rules and regulations issued implementing the said Tax Code shall prevail (Reve Memorandum Circular 22-04, Apr. 12, 2004). COnform, Blemensi determin” Internal Revenue Laws Revenue law is a law passed for the purpose of authorizing the levy and collection g taxes in some form to raise revenue. A revenue law {s said to be a national revenue lay when it is applicable all over the country. er political nor penal in nature although there are lin nature, Internal revenue laws are nei penalties in case of violations. Tax laws are ci 4 nilaHistory of the Philippine internal Revenue Law The first Philippine Internal Revenue Law, patterned after that existing in the United States, was approved by the Philippine Commission on July 2, 1904 as Act 1169 effective ‘Aug. 4, 1904. Subsequent internal revenue laws were approved in 1913, 1916 and 1917. On June 15, 1939, the National Assembly approved the National internal Revenue Code (NIRC) as Commonwealth Act 466, which took effect on July 1, 1939. The Code was amended by Republic Act 6110 otherwise known as The Omnibus Tax Law in 1969, Presidential Decree 69 in 1972, NIRCs of 1977 and 1986, and various presidential decrees and executive orders. Enacted on July 28, 1997 by the Philippine Congress was Republic Act 8424, An Act Amending the National internal Revenue Code, As Amended, And For Other Purposes, ‘otherwise known as the “Tax Reform Act of 1997.” The Act declares the policy of the State to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; to provide, a5 much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; and to create 2 robust environment for business to enable firms to compete better in the regional as well as the global market, at the same time that the State ensures that Government is able to provide for the needs of those under its jurisdiction and care. The Code imposes progressive rates of income taxes on citizens and resident aliens. The progressive scheme of income taxation was introduced in our tax system as 2 measure Of raising more revenues to meet adequately the increasing needs of the government and at the same time to correct inequalities in taxation by equitably distributing the tax burden based upon the principle of ability to pay. ‘The Bureau of Internal Revenue ‘The Bureau of Internal Revenue (BIR) functions under the supervision and control of the Department of Finance (DOF). The Bureau was created by Commonwesith Act 466, approved by the National Assembly on June 15, 1939, effective July 1, 1939, which revised and codified the then internal revenue laws of the Philippines. ‘The mission of the BIR is “to collect taxes efficiently and effectively, for and at the least cost to the government, through impartial and consistent enforcement of internal revenue laws, and convenient and honest service to taxpayers.” BIR collection accounts for more than 60% of the national government's total revenues. ‘The BIR carries the bulk of the burden of solving the country's budget deficit problem.ene carer cen ‘Tax Collection System ited resources, the BIR adopted the 3 was enacted in 1959- REDUblic Ace = ined this principle, With a growing taxpayer population and I assessment system” when Republic Act 234: “otherwise known as the Tax Reform Act of 1997 retal Under the self-assessment system, the taxpayer calculates the pales OF through, ‘an accountant, fills up is tax return, files it with the proper to" 0, Bt PAYS the tay ddue thereon upon fing. The process by which the tax is compe” St Stermi what is called the “self-assessment” method, and the resulting tx 2 "sell-assessed” ta, various collection methods, amending pr ‘Over the years, the BIR has employed SO prinentamene ‘or introducing innovations as the need arises. eee collection utilized by the BIR may be classified into two (2) major categories: collection through voluntary compliance and collection by enforcement. The act of tendering the nt of the self-assessed tax is referred to as “volunt, se cveneey pare snforcement, on the other hand, compliance” or “voluntary payment.” Collection by er conducted through the identification of sectors of business or industries, anda, segments of economic activities where the degree of compliance is low, ang subsequent audit or investigation of enterprises and companies that are part of selected industries. ‘The Attrition Act of 2005 Republic Act 9335, otherwise known as the Attrition Act of 2005, was enacted to improve the revenue collection performance of the BIR and the Bureau of C (80C) through the creation of a Revenue Performance Evaluation Board and of 5 Rewards and Incentives Fund. This Act shall cover al officials and employees of the Bi ‘and the BOC, regardless of employment status, with at least six months of service, The Board has the following powers and functions: 1. to prescribe the rules and guidelines for the allocation, distribution and release of the Fund; 2. to set the criteria and procedures for removing from service officials and employees whose revenue collection falls short of the target by at least 7.5%; 3. to terminate personnel in accordance with the criteria adopted; and 4. to prescribe a system for performance evaluation. 16The Fund Is to be sourced from the collection of BIR and BOC in excess of thelr respective revenue targets for the year as provided below: Excess of Collection Over Percent (%) of the Excess the Revenue Targets Collection to Accrue to the Fund 30% or below + 15% More than 30% = 15% of the frst 30% plus 20% of the remaining excess R.A. 9335 took effect on Feb. 11, 2005. However, its implementation has been deferred to June 2006. This law and its IRR are constitutional (BOCEA vs. Hon. Margarito 8. Teves, et al, Supreme Court (En Banc) G.R. 181707, Dec. 6, 2011). Policy Directions on E-Commerce With the promulgation into law of R.A. 8792 or the E-Commerce Law, which provides for the legal recognition and use of electronic commercial and non-commercial transactions, it now becomes imperative for the BIR to introduce this concept into its existing tax administration system. ‘The BIR is leaning towards the following policy directions insofar as they relate to E- Commerce transactions: 1, Tax neutrality should be the governing principle in the interim. This presupposes that the taxing authority should impose no more taxes upon E-Commerce transactions than what is imposed upon the same activity conducted by conventional means 2, All other taxation principles, which guide the government in relation to conventional commerce, should be the same guiding principles applicable to E-Commerce transactions. 3. BIR will harness the potential of E-Commerce in bringing about greater efficiency in raising revenues and an improved taxpayer service. 4, BIR will rationalize its role in providing an appropriate fiscal environment within which E-Commerce may flourish, ensuring that business decisions are influenced by economic considerations rather than by tax considerations. 5. The tax treatment for E-Commerce transactions should have a high international acceptance, but it must strike a balance between the fiscal sovereignty of the Philippines and the fair sharing of the tax base on its counterpart countries with a view to avoiding double taxation, 7HN Wysuanees and ‘Wulings Defined Revenue Nequtations (RAs) ove issuances signed by the Secretary Of Fin Fecammendation of the Commissioner of internal Revenue, that specity, 654, tefine rules and regulations for the effective enrorcement OF the provis, T ¢ National internal Revere Cosa (NINC) and rated statutes oy "ey, Revenue Memorandum circulars (RMcs) are Wswances (Hat PBI porting ‘plicable portions, ax well as amplifications of laws, res FOHUIALIONS an yg Ay ‘nsued by the (IR and other agencies/offices, Sony Revenue Memorandum Orders (RMOs) are issuances Ihat PFOVIdE dire structions; prescribe guidelines; and outline processes, operatios ‘workflows, mothods and procedures necessary inthe Implementation of s Hoals, objectives, plans and programs of the Bureau in all ar auditing, thay 9 acti On of Stated pojat ' of Operations, Ba) Revenue Memorandum Rulings (RMAs) are rulings, opinions and interpretation, Commissioner of Internal Revenue with respect to the provisions of the Tax other tax laws, ax applied to a specific set of facts, with or without esta, Precedents, and which the Commissioner may ssue from time to time for the pu Of providing taxpayers guidance on the tax consequences In specific situation, Rulings, therefore, cannot contravene duly issued RMAs; otherwise, the Rulings arg and void ab initio, % BIR Rulings ave official positions of the BIR on Inquiries of taxpayers, Who ¢ clarification on certain provisions of the Tax Code, other tax faws, oF their implemy ‘egulations, usually for seeking tax exemptions, Rulings are based on particular and circumstances presented and are interpretations of the law at a specific poin, time, Tax rulings cannot be cited as precedent, but can provide useful information oy how the BIR may treat a similar transaction. They ae also issued to answer question, g individuals and juridical entities regarding their status a5 taxpayers, and the effec y thelr transactions for taxation purposes We, iy The BIR does not give planning advice or “approve” tax planning arrangements y resolve an issue through a ruling if the matter can be determined through anothy, process (i¢., appeal). The Law and Legislative Division will not issue a ruling in r sDonye to a request in the following instances: 1. The taxpayer has directed a similar inquiry to another office ofthe BIR; 2. The same Issue involving the same taxpayer of a related taxpayer Is pending in a case litigation; 3. The same issue involving the same taxpayer Is the subject of a pending investigation, ‘ongoing audit, administrative protest, claim for refund or isuance of tax credit certfate, collection proceeding (Revenue Memorandun» Order 9-2014, Feb, 6, 2014) 18Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements cof the Commissioner of Internal Revenue that consolidate the Bureau of tnternal Revenue's position on certain specific isues of law or administration in relation to the provisions of the Tax Code, relevant to tax laws and other issuances for the guidance of the put ‘The BIR also issues Revenue Audit Memorandum Orders (RAMOS). Revenue Regulations 5-2012 was published on April 4, 2012. Then, the Commissioner, thru RMC 22-2012, clarified that: 1, AILBIR culings issued prior to Jan. 1, 1998 (the effectivity date of RA. 8424) ~ 8. Are not be used as precedent by any taxpayer as a basis to secure rulings for themselves for current business transaction/s or in support of thelr postion against any assessment; b, Are not to be used by any BIR action lawyer in issuing new rulings for request for rulings \nvolving current business transaction/s. 2, BIR rulings issued prior to Jan. 1, 1998 remain valid but only a. To the taxpayer who was issued the ruling; and 'b. Covering the specific transaction/s which is the subject of the same ruling. 3, BIR rulings issued prior to Jan. 1, 1998 shall remain valid as mentioned above, unless expressly notified of its revocation or unless the legal basis in law for such issuance has already been repealed/amended in the current Tax Code. A BIR issuance cannot be applied retroactively if it will prejudice the interest of taxpayers (COL Financial Group, Inc. vs. Commissioner of Internal Revenue, CTA (3rd Division) Case 8454, Apr. 15, 2014). Powers and Duties of the Bureau of Internal Revenue The chief officials of the Bureau are the Commissioner and seven (7) Deputy Commissioners. The Deputy Commissioners are tasked to handle particular groups within the Bureau such as information systems, legal and inspection, operations, resource management, tax reforms administration, special concerns and large taxpayers. Its powers and duties follow: 1. Assessment and collection of all national internal revenue taxes, fees and charges; 2. Enforcement of all forfeitures, penalties, and fines; 3. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals, and ordinary courts; and 4, Administration of supervisory and police powers conferred to it. 19Powers of the Commissioner Interpret tax laws and decide t@* cases and take testimony Of perso, i Sn, examine, ns; 2. Obtain information, and to sumo" on yirement fOr tax. administrati, rescrive add ng subordinate officer with, te nk Make assessments and pr enforcement. ic 4. Delegate powers vested in him bythe Cale 1°2°7 ‘equivalent to a division chief or ‘higher. of a taxpave ind or credit taxes. ne 11, “The Exchange of In Mar. 5, 2010, the President signed RepUble A misionet ofthe ain on Tax Matters Act of 209," Tslaw OWS CTT Lok into a taxpaye' powers to fight tax evasion by expanding iS autnorath the requestin ers fe accounts and sharing the obtained information B foreign, ate authority. S. Suspend business operation: 6. Compromise, abate and refu Section 3 of RA 10021, mending Seton sf of set hs Ta Raton he 1997, provides the Commissioner with the a rehon be dank depa accounts and other related information held by fr! a) 1. Adecedent to determine his gros estates «ation for comproris cil incapacity to ay | When a taxpayer files an applation to comproise the payment oF NS 1 Hablitieg ton his daim that is financal postion demonstrates 2 clear mabe On Bs Bart to pay tax assessed, is appation shall ont be considered upon wating In WF his ig under Republic Act 1405, Republic Act 6426, otherwise known 25 the Foreign Cun Depaul det of the Phizpnes, or under ater general oF sped IaWS. THe Waiver Constitutes as the suthorty of the Commissioner to inquire ito the bank deposits g ea taxpayer. the 3. A specific taxpayer or taxpayers subject of foreign tax authority pursuant to an internation: to which the Philippines isa signatory ora party from the banks and other financial institutions ma Revenue for tax assessment, verification, audit and en fe of hs tax liabi 2. Any Taxpayer who has filed an appl ae. IY Under see E (AIG) of this Code by reason of fnan« request forthe supply of tax information f a convention of agreement on tax meen? ‘of Provided, That the information obs be used by the Bureau of ing forcement purposes. era In case of a request from a foreign tax authority for tax information held by banks ang financial institutions, the exchange of information shall be done in a secure manner 4g ensure confidentially thereof under such rules and regulations as may be promulgateg by the Secretary of Finance, upon recommendation ofthe Commissioner. »The Commissioner shall provide the tax information obtained upon request of the foreign tax authority when such requesting foreign tax authority has provided the following information to demonstrate the foreseeable relevance of the information to the request: a. The identity of the person under examination or investigation; 'b, Astatement of the information being sought including its nature and the form in which the sald foreign tax authority prefers to receive the information from the Commissioner; ‘¢ The tax purpose for which the information is being sought; 4. Grounds for believing that the information requested is held In the Philippines or is n the possession or control of a person within the jurisdiction of the Philippines; €. To the extent known, the name and address of any person belleved to be In possession of the requested information; {,_Asstatement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its laws or in the normal course of administrative practice and that itis in conformity with a convention or international agreement; {& Astatement that the requesting foreign tax authority is also allowed under its domestic laws to exchange or furnish the information subject ofthe request (RR 10-2010, Oct. 6, 2010); and h,Astatement that the requesting foreign tax authority has exhausted all means available in its ‘own territory to obtain the information, except those that would give rise to disproportionate difficulties. Revenue Regulations 3-2014, issued Feb. 11, 2014, amended Sec. 10 of RR 10-2010, to read as follows: “A taxpayer shall be duly notified in writing by the Commissioner that a foreign tax authority is requesting for exchange of information held by financial institutions pursuant to an international convention or agreement on tax matters within {60 days from receipt of the said request. However, if notification within this period will undermine the chances of success of the investigation conducted by the requesting foreign tax authority, the taxpayer shall be notified within 6 calendar months from receipt of the request.” x Incentives ‘An example of a law that grants tax incentives is the Adopt-a-School Act of 1998 (R.A. 8525). Revenue Regulations 10-2003 implements the tax incentive provisions of said law. A pre-qualified adopting private entity which enters into an agreement with @ public school shall be entitled to the following tax incentives: ‘¢ Deduction from grass income of the amount of contribution/donation that were actually, directly and exclusively incurred for the Program, subject to limitations, plus an additional amount equivalent to 50% of such contribution/donation; © Exemption of the Assistance made by the donor from payment of donor's tax. Donation and donor's tax are covered in another text, Transfer and Business Taxation by the same book team. apromotion Act of 2 Section 19 of R.A. 10028, the Expanded Breastfeeding PRE estab ante, that “The expenses incurred by a private health 2nd 10% TT A uctibe expert Mg, {nstitution, in complying with the provisions of this AG. SMAL O 5 The fy income tax purposes up to twice the actual amount WHET Tt That deduction shall apply fo the taxable period whe the XPT Prove further, That all health and non-health facies, establish foe RS eprovel: pet thay ‘comply with the provisions of this Act within ix(6) months a PPRTOVGI: Prot {nay That such facies, estabishmens of inttutons SN TEC 8 Wont Mother-Baby-Friendly Certificate" from the Department of Hen!) with the Bureau of internal Revenue, before they can aval ofthe incentive: f 2010, a lawyer oF profe, acto Per Republic Act 9999 or the Free Legal Assistance ACE AAO Tc Conese Partnerships rendering actual fre legal services, a8 defn 1 Court be entitled to an allowable deduction rom the roscoe, the AMOUR thay cons have been collected for the actual free legal services rendered S up to 10% of the Brox income derived from the actual performance of the legal profession, whichever jg lower, Provided, That the actual free legal services herein contemplated shall be exclys, @ the minimum 60 hours mandatory legal aid services rendered to indigent litigants, s Fequired under the Rule on Mandatory Legal Aid Services for Practicing Layyy_ °° under BAR Matter 2012, issued by the Supreme Court. 3 INCOME AND INCOME TAXES Income Defined and Distinguished from Capital ‘Income, in its broad sense, means all wealth, which flows into the taxpayer other than , mere return of capital. itis the return in money from one’s business, labor, or ¢; invested, e.g, gains, profits, salary and wages. The words ‘income from any sourey whatever’ disclose a legislative policy to include all income not expressly exempted fr. the class of taxable income under our laws (Commissioner vs. BOAC, 1-65773, Apr. 39 1987, citing Madrigal vs. Rafferty, 38 Phil. 14). Income is also defined as the amount of money coming to @ person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income may also be thought of as a flow of the fruits of one’s labor, Capital is a fund or property existing at one distinct point of time. Income, on the other hhand, denotes a flow of wealth during a definite period of time. While capital \s wealth, income is the service of wealth. In the Madrigal case, the Supreme Court made an essential distinction between capital and income: “..capital is a fund, while income is a flow; capital is wealth, while income is the service of wealth; capital is a “tree” and income is the “fruit”.” 2Income Tax Defined, Base and Nature Income tax is a tax on all yearly profits arising from property, profession, trade or business, or is a tax on a person’s income, emoluments, profits and the like. Income tax is generally regarded as an excise (privilege) tax. It is not levied upon persons, property, funds, or profits as such but upon the right of a person to receive income or profits. Income tax is based on income, either gross or net, realized in one taxable year, 'mustration. Source: Philpine Daly Inquirer vs. Commissioner of Internal Revenue, CTA (Fist Dsision) Case 7853, Feb. 16,2012 Respondent Commissioner of Internal Revenue assessed Petitioner Philippine Dally Inquirer (POI) for alleged deficiency Income tax and VAT for taxable year 2004, Based on a computerized matching of information provided by third party sources against POI's VAT returns, the CIR clalmed that POI under-declared its ‘purchases for 2008 which resulted in undeclared income that Is subject to income tax and VAT. PI protested the assessment and argued, among others, that it did not under-declare is gross income for 2004, As the CIR failed to act on the protest within the prescribed period, POI filed a Petition for Review with the Court of Tax Appeals (CTA). Is PD able for deficiency VAT and income tax? No. The CIR has no basis to assess deficiency income tax and VAT for under-declaration of taxpayer's purchases. The CIR’s theory that under declaration of purchases translates to taxable income for income ‘ax purposes and taxable gross receipts for VAT purposes has no basis The three elements on the imposition of income tax are (a) there must be gain or profit, (b) the gain or profit i realized or received, actually or constructively, and (c) it is not exempted by law or treaty. Income taxis assessed on income received from any property, activity or service. In assessing income tax, it must be Clear that there was an income which was receved by the taxpayer, not when there is an under-decaration of purchases. For income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the authorized amount, Thus, even when there is under-declaration of input tax, which means that there is 330 a corresponding under-declaration of purchases or expenses, the same is not prohibited by law. ‘Accordingly, the CIR's income tax assessment does not hold water as it simply relies on the fat that there is under-declared input taxand purchases. Similariy, VAT is assessed on the ‘gross receipts’ derived from the sale or exchange or services. ‘Gross receipts’ is defined under the aw asthe total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty actually or constructively received during the taxable {quarter forthe services performed or to be performed for another person. In assessing VAT, iis critical to show that the taxpayer received an amount of money or its equivalent for services performed, and not ‘when there are under-declared purchases 2BGeneral Procedures in Determining Income Tax the computational procedure by whe, amir with the basic tePS of the ¢, pective when studing Subseqyeny The following page is a generalized overview the national income tax is determined. Being determination process should help you maintain Pes chapters of ths text, Step 1 is to identity the taxpaying party OF ‘entity’ to which eae formula apples. Some legal ents are taxed; others are nt, TRXPAYNE TEE clude individuals, most corporations, private partnerships and estat os (GPP arate businesses such as proprietoships and general professional partnerships 0S) are nop taned; rather, their income ls taxed. direct’ to the owners OF SOY sinesses, Citizenship and residency are also considered Other enites such 2s Wass Are treateg in yt another fashion, with teie incomes being taxed tothe trusts if retained, but taxa to the trust's beneficiaries if distributed. Pertinent chapters are Chapters 2 Individual, 3 &4 ‘Corporations’ Estates and Trusts’ and 6 ‘Partnerships and Partners: 4s income.” Appreciation in market value jg purposes unless realized through a sale gy de provides for several specific types of for purposes of measuring BOSS income without) must also be known, ‘ome are covered in Chapter 7 Step 2 is to determine the taxpayer's “B10! not generally regarded as income for tax exchange. Even if income is realized, the Cot income to be “excluded,” that is, not counted The source of income (whether within the Philippines OF Tax concepts that underlie the determination of gross inct ‘Gross Income.” Step 3 is to determine the expenses and certain other items that can be “deducted? in computing the taxpayer's “taxable income.” General criteria for deductible business expenses are set forth in Chapter 10 ‘Allowable Deductions,’ while several specific personal deductions are discussed in Chapter 2 ‘Individuals Step 41s to apply the appropriate “tax rate” to the taxpayer's taxable income to find the “tax due.” For any particular taxpayer, the applicable rate depends on the type of taxpaying entity, level of income, and in the case of an individual, his or her marital status and certain other aspects. The rules for determining appropriate tax rates for each type of taxpayer are covered in the chapters cited in Step 1. Step 5 is to subtract any applicable “tax credits/payments” from the taxpayer's tax due in finding the “tax payable.” Unlike deductions that reduce taxable income, tax credits/payments are a direct offset to the tax itself. These credits are specified for various situations in numerous sections of the Code. Several credits available to taxpayers are covered in Chapters 11 ‘Withholding Taxes’ and 12 ‘Foreign Tax Credit. ‘Step 6 is to increase the tax by “penalties and interests” to obtain the “total amount payable.” Details of these are discussed in Chapter 13 ‘Penalties.’ In summary, most of the contents of this book can be viewed as an amplification of these procedures. u