DAY 2 (PM) Taxation Law Flashcards
I. May a taxpayer who has pending claims for VAT input credit or refund set-off said claims against his other tax liabilities? Explain your answer.
No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. If the claim of the taxpayer for VAT refund is still pending and the amount has still to be determined, a fortiori, the liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor.
(Philex Mining Corp. v. CIR, G.R. No. 125704, August 29, 1998)
I. May a taxpayer who has pending claims for VAT input credit or refund set-off said claims against his other tax liabilities? Explain your answer.
(alternative answer)
No. Taxes and claims for refund cannot be the subject of set-off for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and claim for refund. Claims for refunds just like debts are due from the government in its corporate capacity, while taxes are due to the government in its sovereign capacity.
(Philex Mining Corp. v. CIR, G.R. No. 125704, August 29, 1998)
II. a) Distinguish a tax amnesty from a tax exemption.
Tax amnesty is an immunity from all criminal, civil, and administrative liabilities arising from non-payment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application.
(People v. Castaneda, G.R. No. L-46881, September 15, 1988)
Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which other are subjected.
(Florer v. Sheridan, 137 Ind. 28, 36 NE 365). It is generally prospective in application.
II. b) Distinguish direct taxes from indirect taxes, and give an example for each one.
Direct taxes are taxes wherein both the incidence (or liability for the payment of the tax) as well as the impact or burden of the tax falls on the same person. An example of this tax is income tax where the person subject to tax cannot shift the burden of the tax to another person.
Indirect taxes, on the other hand, are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person. An example of this tax is the value-added tax. (Aban, Law of Basic Taxation, p. 20)
II. b) Distinguish direct taxes from indirect taxes, and give an example for each one.
(alternative answer)
A direct tax is a tax which is demanded from the person who also shoulder the burden of the tax. Examples include corporate and individual income taxes.
An indirect tax is a tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, and the burden finally resting on the ultimate purchaser or consumer. An example is value-added tax.
III. a) May the collection of taxes be barred by prescription? Explain your answer.
Yes. The collection of taxes may be barred by prescription. The prescriptive periods for collection of taxes are governed by the tax law imposing the tax. However, if the tax law does not provide for prescription, the right of the government to collect taxes becomes imprescriptible.
III. b) May the courts enjoin the collection of revenue taxes? Explain your answer.
As a general rule, the courts have no authority to enjoin the collection of revenue taxes. (Sec. 218, National Internal Revenue Code of the Philippines)
However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Section 11, RA 1125)
IV. a) How often does a domestic corporation file income tax return for income earned during a single taxable year? Explain the process.
A domestic corporation is required to file income tax returns for four (4) time for income earned during a single taxable year. Quarterly returns are required to be filed for the first three quarters where the corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis. (Section 75, National Internal Revenue Code of the Philippines)
Then, a final adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal. (Section 76, National Internal Revenue Code of the Philippines)
IV. b) What is the reason for such procedure in IV.a) above?
The reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year.
Another reason for the quarterly filing of tax returns is to allow partial collection of the tax before the end of the taxable year and also to improve the liquidity of government.
V. Taxpayers whose only income consists of salaries and wages from their employers have long been complaining that they are not allowed to deduct any item from their gross income for purposes of computing their net taxable income. With the passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid? Explain your answer.
No more. Gross compensation income earners are now allowed at least an item of deduction in the form of premium payments on health and/or hospitalization insurance in an amount not exceeding Php 2,400.00 per annum [Section 34(M)]. This deduction is allowed if the aggregate family income do not exceed Php 250,000.00 and by the spouse, in case of a married individual, who claims additional personal exemption for dependents.
VI. a) What is meant by income subject to “final tax”? Cite at least two examples of income if resident individuals that is subject to the final tax.
Income subject to final tax refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income. The recipient is no longer required to include the item of income subjected to “final tax” as part of his gross income in his income tax returns. Examples of income subject to final tax are dividend income, interest from bank deposits, royalties, etc.
VI. b) Distinguish “Exclusion from Gross Income” from “Deductions from Gross Income”. Give an example of each.
Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer’s taxable income, due to the following reasons:
(1) It is exempted by the fundamental law;
(2) It is exempted by statute; and
(3) It does not come within the definition of income (Section 61, Revenue Regulations No. 02-40).
Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income.
Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income.
Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income.
An example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured, which is not an income or 13th month pay of an employee not exceeding Php 30,000.00, which is an income not recognized for tax purposes. An example of a deduction is business rental.
VII. What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer.
The reason for imposing final withholding tax rather than the progressive tax schedule on cash dividends received by a resident citizen or alien from a domestic corporation is to ensure the collection of income tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through the filing of income tax returns, there is no assurance that the taxpayer will declare the income, especially when there are other items of gross income earned during the year. It would be extremely difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding agents compared to the number of income recipients.
Likewise, the imposition of a final withholding tax will make the tax available to the government at an earlier time. Finally, the final withholding tax will be a sure revenue to the government unlike when the dividend is treated as a returnable income, where the recipient thereof who is in a tax loss position is given the chance to offset such loss against dividend income, thereby depriving the government of the tax on said dividend income.
VII. What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer.
(alternative answer)
The reason why cash dividends received by a resident citizen or alien from a domestic corporation are subjected to the final withholding tax of 10% and not at the progressive tax rate schedule is to lessen the impact of a second layer of tax on the same income.
VIII. A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for Php 1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php 800,000.00, which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? Why?
No. The 6% capital gain tax on sale of a real property held as capital asset is imposed on the income presumed to have been realized from the sale which is the fair market value or selling price thereof, whichever is higher. (Section 24(D), National Internal Revenue Code of the Philippines).
Actual gain is not required for the imposition of the tax but it is the gain by fiction of law which is taxable.
