INCOME TAX

COMPUTATION

& REMEDIES

Prepared by: Maricel D. Arthur, CPA

BIR MANDATE
The

Bureau of Internal Revenue is mandated by law to assess and collect all national internal revenue taxes, fees and charges, and to enforce all forfeitures, penalties and fines connected therewith, including the execution of judgements in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts (Sec. 2 of the National Internal Revenue Code of 1997).

2 Tax Authorities in the Philippines

(Provinces, Municipalities, Cities, Barangays)

Tax on business; Real Property Taxes; Franchise Tax; Toll fees or charges; Community Taxes and others.

(Bureau of Internal Revenue/Bureau of Customs) Income Tax; Value-Added Tax; Percentage Tax; Excise Tax; Others.

Powers of the Commissioner of internal revenue (sec 4,5 & 6)

Sec

4: Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases; Sec 5: Power of the Commissioner to obtain Information, and to Summon, Examine, and Take Testimony of Persons Sec 6: Power of the Commissioner to Make Assessments & Prescribe Additional Requirements for Tax Administration & Enforcement.

HOW TO COMPUTE INCOME TAX DUE

Income Tax rates-CORPORATIONS

Regular

Income Tax Rate of 30% based on taxable income Corporate Income Tax- 2% Gross Income starting on the 4th year of operations.

Minimum

Income Tax rates-Individuals

over Not over tax is Plus Of the excess over

10,0000 10,000 30,000 500 30,000 70,000 2,500 70,000 140,000 8,500 140,000 250,000 22,500 250,000 500,000 50,000 500,000 125,000

5% 10% 15% 20% 25% 30% 32%

10,000 30,000 70,000 140,000 250,000 500,000

Personal & Additional Exemption

An individual tax filer shall be allowed a basic personal exemption of Fifty Thousand Pesos (P50,000). In the case of married individuals where only one of the spouses is deriving income, only such spouse shall be allowed the personal exemption. An individual shall be allowed an additional exemption of P25,000 for each qualified dependent child, not exceeding four (4).

Qualified dependent Child

means

a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect

SUMMARY
PERSONAL Single/ head of the family/Married with no dependent 50,000.00 ADDITIONAL NONE TOTAL 50,000.00

1 (one) qualified dependent child 2 (two) qualified dependent children 3 (three) qualified dependent children

50,000.00 50,000.00 50,000.00

25,000.00 50,000.00 75,000.00

75,000.00 100,000.00 125,000.00

4 (four) qualified dependent children

50,000.00

100,000.00

150,000.00

HOW TO COMPUTE THE INDIVIDUAL INCOME TAX (EXAMPLE)

Gross Receipts/Sales 1,590,000.00 Less: Cost of Sales/Services (1,240,000.00) Gross Income 350,000.00 Add: Other Taxable Income 140,000.00 Total 490,000.00 Less: Allowable Deductions 190,000.00 Net Income 300,000.00 Less: Personal Exemption 50,000.00 *Additional Exemption 50,000.00 100,000.00 Taxable Business Income 200,000.00 Income Tax Due *if two qualified dependent children 37,500.00

Income Tax ratesover Not tax is Individuals

over

Plus

Of the excess over

10,000 30,000 70,000 140,000 250,000 500,000

10,0000 10,000 30,000 500 30,000 70,000 2,500 70,000 140,000 8,500 140,000 250,000 22,500 250,000 500,000 50,000 500,000 125,000

5% 10% 15% 20% 25% 30% 32%

THE AUDIT PROCESS & REMEDIES

First Step: Selection of Tax Audit Target

Tax

1. 2. 3. 4.

examinations are based on selection criteria that are set yearly by the Commissioner of Internal Revenue in an ANNUAL AUDIT PROGRAM. Taxpayers are classified into categories: Mandatory cases; Top Priority Cases; Other Priority taxpayers; and Revenue District Officers discretion.

2nd Step- Commencement of Tax Audit

Letter

of Authority- authorizes a revenue officer of the BIR to conduct audit/investigation and examine the books of accounts and accounting records of a taxpayer for possible assessment of deficiency taxes and penalties.

3rd Step- Issuance of Preliminary Assessment Notice

The Assessment

Division determines whether or not there exists a sufficient basis to assess the taxpayer for any deficiency tax, a preliminary assessment notice (PAN) will be issued. The PAN must state the facts, law, rules and regulations upon which the assessment was based.

When is the issuance of preliminary assessment notice not necessary?

1. 2.

3.

4.
5.

Error in computation evident on the face of the return Discrepancy in the amount of tax withheld and tax remitted Taxpayer who opted to claim a tax refund or tax credit was determined to have carried over and applied the amount against succeeding liabilities Excise taxes due have not been paid Articles (such as cars) purchased by taxexempt persons have been transferred to nonexempt persons.

4th Step- Issuance of Formal Letter of Demand and Assessment Notice

Final Assessment Notice- a written notice and demand made by the BIR on the taxpayer for the settlement of a tax liability that has been definitely determined. It must state the facts, law, rules and regulations on which the assessment is based, otherwise it is void. -administrative appeal within date of receipt (PROTEST)

30 days from the

-within 60 days from filing of protest, all relevant supporting documents shall have been submitted.

In case of denial of protest in whole or in part, or is not acted upon within 180 DAYS FROM SUBMISSION OF DOCUMENTS
The

taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within 30 days from the receipt of decision or from the lapse of the 180-day period. Otherwise, the decision shall become FINAL, EXECUTORY & DEMANDABLE)

Civil Remedies for collection of delinquent taxes

a.) By DISTRAINT of goods, chattels or effects and other personal property of whatever character, including stocks and other securities, debt, credits, bank accounts, and interests in and rights to personal property, and by LEVY upon real property and interest in or rights to real property; and b.) By civil or criminal action. (Either of these remedies or both simultaneously may be pursued in the discretion of authorities charged with the collection of such taxes)

Section 218: INJUNCTION NOT AVAILABLE TO RESTRAIN COLLECTION OF TAX

No

court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge imposed by the Tax Code.

Sec 229. Recovery of Tax Erroneously or Illegally Collected

No

suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment. But, the CIR may without written 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.

Forfeiture
Forfeiture

of Tax Refund- if remains unclaimed or uncashed within five (5) years from the date of such warrant or check was mailed or delivered shall be forfeited in favor of the government and the amount thereof shall revert to the general fund. Forfeiture of Tax Credit- A TCC which shall remain unutilized after five(5) years from the date of issue, unless revalidated , shall be considered invalid.

In case of overpayment
An

excess of the total tax credits/payments over the actual income tax due computed in the final adjusted return may be refunded or issued with the Tax Credit Certificate to the taxpayer or credited against its estimated income tax liabilities for the quarters of the succeeding taxable years.

REQUISITES OF TAX REFUND OR TAX CREDIT

1.

Claim must be in writing; 2. It must be filed with the Commissioner within two (2) years after the payment of the tax or penalty. Note: No suit or proceeding shall be begun after the expiration of the said two (2) years regardless of any supervening cause that may arise after payment. 3. Show proof of payment.

QUESTIONS?

Tax avoidance vs tax evasion

TAX AVOIDANCE TAX EVASION

Validity Effect

Legal and not subject Illegal and subject to criminal penalty to criminal penalty Minimization of taxes Almost always results in absence of tax payments

INDICIA OF FRAUD IN TAX EVASION FAILURE TO DECLARE FOR TAXATION PURPOSES TRUE AND ACTUAL INCOME DERIVED FROM BUSINESS FOR 2 CONSECUTIVE YEARS (REPUBLIC VS GONZALES, L-17962) Substantial under-declaration of income tax returns of the taxpayer for 4 consecutive years coupled with intentional overstatement of deductions