pinoytaxation.com » Gen. principles

Why are penalties imposed by the BIR?

pinoytaxation — Mon, 17 Aug 2009 18:09:27 +0000

At present, doing business is a bit an inch of perfection, if not a mastery of craft, in order to maximize the use of its finances for success. Many promising undertakings could be made on the funds wasted on penalties. Sometimes, no matter how and what measures are employed not to overlook some reportorial requirements, that they simply occurs unnoticed. This may prove that, sometimes, simple errors are big headaches in business. The question is why these penalties have to be imposed, even on honest mistakes and simple inadvertence?

Taxes are the lifeblood of the government, without which, it cannot subsist. This dictates that taxes owing to the government shall come in due time and in exact amounts so as not to cause any untoward delay and interruption in its performance of its duties and responsibilities to the citizenry. Impliedly, excuses in the delay of payment, no matter how reasonable, may not defeat the need for the government to exist. Thus, to be fair to the BIR and the government, it maybe a good start to know the rationale on the imposition of these penalties– 25%/50% surcharge, 20% interest, and compromise penalties.

Surcharge is a one-time imposition upon failure to pay the tax due in full in due time. The rate 25%, in general, except if fraudulent in character where 50% is used. It is intended to hasten tax payments or to punish evasion or neglect of duty in respect thereof.

On the other hand, the imposition of 20% interest annually from the time a basic tax due is bound to be paid until such time that it becomes fully paid, is but a just compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands. The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory for the time value of money in the government’s hands.

Finally, compromise penalty is imposed in lieu of prosecution in court. Instead of taxpayer being sued in court for the particular violation, the taxpayer and the BIR will simply agree upon the payment of compromise in order to do away with the time, effort and money that the litigation process may take.

Why not legally minimize, than evade taxes?

pinoytaxation — Sun, 09 Aug 2009 06:08:23 +0000

Who would not like to pay a lower tax, or a no tax at all? For a lowly paid laborer or an average employee or even an executive, a single penny paid to tax is very material as it may make his ends met for the day or may have been spent for a more productive spending had it not been for taxes. For a businessman, funds paid for taxes is likewise material as he can make much of it had the money been invested in other profitable undertaking. But for the government, a tax is indispensable for its subsistence, for the public expenditures, and for the furtherance of its administration. Thus, there is conflicting interest between the government and the taxpayer. The taxpayers always wanted for less while the government bargains for more. Nevertheless, all these shall be within the bounds of the law and regulations. But the question is, how can you save taxes without violating provisions of the law and regulations?

First, you must learn the basic concept of the two terms – tax evasion or dodging, and tax minimization. Tax evasion denotes use of ways, means, or schemes employed to lower or minimize taxes, if not eliminate, where such ways and means are in violation with laws and existing regulations. In other words, this are illegal ways of lowering taxes, and is criminal in nature that may send the violator behind bars as a consequence or be required to pay higher penalties (e.g. surcharge of 50% of unpaid basic tax plus 20% interest, and compromise). Typical example is not declaring a taxable income and not paying taxes due, or declaring false and fictitious expense items to lower the tax base for lesser tax. Under the rules, a false declaration of at least 30% of that declared is considered as tax evasion by its face, unless justified by the circumstances of the case through the due process requirement applicable.

On the other hand, tax minimization refers to ways, means and schemes tending to save on taxes in accordance with the law and regulations. The price is the tax saved by a good scheme. To do so, one must be equipped with technical know-how on the conflicting and varied rules of tax laws and regulations. Thus, assistance of an expert professional to formulate schemes and evaluate compliance with the laws and regulations may be resorted to for safety purposes. A good scheme should pass the test of compliance or defensibility in any forum, practicability, and doability under the circumstances. While the intention may be good, if the scheme could not stand the test of compliance with laws and regulations, the taxpayer may spent to much on penalties for wrongful application of law instead of the intended savings. Or worst, the taxpayer may end up itself defending in court. Practicability refers to the applicability of the scheme to the company to be applied upon.

One area of tax minimization is through the tax exemptions provided for in the general and special laws and regulations. Tax exemption refers to an immunity from tax of a particular entity or transaction under certain conditions. All it takes is to see to it that your circumstances would faithfully satisfy the conditions and requirements for its applicability. A slight twist may do, but should not deviate from the basic conditions. The Tax Code, as amended, does not contain all the exemptions and there are many of those scattered in various laws. Of course, the Constitution provides some of this and some exemptions provided for by special laws are in furtherance of this Constitutional mandate only. For a certain industry of entity, a better way is to go through the history of its legal evolution, the laws passed for such industry or business. Example of this are the thrift banks which enjoyed some in the early stages, the cooperatives, the now renewable energy for the Philippines going green, and more. The tendency is, the legislature tries to provide this exemptions and tax privileges in the early stage of the industry or undertaking, basically, to assist and prepare these emerging industries. Thus, it may take a while to conduct a study or walk through on the applicable laws and regulations of the area you wish to minimize taxes.

Another area, are the formulated schemes in furtherance of a tax privilege or simply for lower tax rates. Similar to exemptions, most laws and regulations provides prescribes requirements. Scattered in the Tax Code provisions, and on other laws are potential areas for these and it may only take a while to know and make use of them. In satisfying these requirements, certain documents and papers have to be executed. It is suggested that extra care and diligence shall be applied to see to it that these documents will properly substantiate and justify that the fact that said tax privilege applies to the case at hand.

Here are some examples to illustrate the points above:

What is the difference between the tax implication of buying a real property, or buying the shares of the selling company?
What is the difference between buying a real property from exchanging the same for shares of the other party and selling the same, after sometime?
What is the difference between giving a straight rate of compensation, say P15,000 a month, or paying the minimum wage exempted by law from income tax and on top, allowances and benefits likewise exempted from income tax, in accordance with company policy?

You may need to consult an expert to know and apply all these, and if you will succeed, then you will be happy enough to see the big difference. Mind you also, the BEST way is saving taxes is paying the correct tax and the right amount of it. By so doing, no funds will ever be wasted for penalties and no worries will ever be made for potential tax exposure in the future. The price for doing GOOD is invaluable, but will prove to be of great value in the end.

“Taxes affect lives, care for taxes and save lives”

What taxes do Philippines impose?

pinoytaxation — Fri, 07 Aug 2009 11:35:01 +0000

Tax types are those specific tax classification imposed by the Philippine’s taxing authorities to taxpayers under specific instances. As to the taxing authority implementing and administering them, they can broadly be classified as follows: (a) national internal revenue taxes, and (b) local taxes.

National internal revenue taxes – those implemented by the Bureau of Internal Revenue (BIR) for the national government and local government, through the sharing scheme with respect to some taxes collected within their jurisdiction. These taxes are compiled in the National Internal Revenue Code otherwise known as the Tax reform Act of 1997 or Republic Act No. 8424, as amended by subsequent legislation, and applicable throughout the taxing jurisdiction of the Philippine archipelago.

1. Income tax – imposed upon the privilege to earn income in the Philippines from whatever source such as compensation or salaries, trade or business, practice of profession, and other sources. This applies to persons earning taxable income, regardless of whether the person is on trade or business or not and whether or not the income is from legal sources. In the application of this tax type, comes the withholding tax system for the following: (a) expanded or creditable withholding tax (CWT); (b) final withholding tax (FWT); and, (c) withholding tax on compensation (WC).

2. Estate tax – imposed upon the privilege to gratuitously transmit properties called “estate” from the decedent to the heirs upon death of the former. It is upon death that this tax accrues.

3. Donor’s tax – imposed upon the privilege to gratuitously transfer properties from one person called the “donor” during its lifetime to another person called the “donee” who accepts it.

4. Value added tax (VAT) imposed upon the sale of goods and services within the Philippines of specific taxable entity. This is a business and consumption tax, which liability is upon those engaged in trade or business, in the practice of profession of residents and citizens. Generally, services of non-residents performed in the Philippines are likewise subject to VAT.

5. Other percentage tax (OPT) – is a business tax like VAT. It is imposed on certain types of transactions and activities, and those, though subject to VAT, the required gross receipts were not achieved and that the taxpayer is non-VAT. Example of OPT are common carriers tax, franchise tax, overseas communication tax, gross receipts tax on banks and non-bank financial intermediaries. VAT and OPT, however, cannot be imposed on the same transaction as they are imposed alternatively.

6. Documentary stamp tax (DST) – is one imposed upon certain transactions, agreements and instruments for the privilege to enter into the same transaction or document evidencing the transaction. Example is DST on transfer of shares of stocks of domestic corporations, real property transfers located in the Philippines, loan agreements executed in the Philippines or when proceeds are intended to be used in the country, insurance policies, and more.

7. Excise tax – is imposed on certain goods produced or manufactured in the Philippines for domestic sale or consumption. VAT is likewise imposed on most of these goods. Sin tax on tobacco and alcoholic beverages is an example along with excise tax on precious minerals, petroleum products and on non-essential goods like automobiles.

Local Taxes – those imposed by the respective local government units (LGU’s), through their local legislative body pursuant to their fiscal autonomy under the Local Government Code of 1991. These taxes are of local application within the jurisdiction of the LGU.

1. Real property tax – is one imposed upon the ownership of real properties located in a particular jurisdiction of a local government unit (LGU). It is based on the value of the property in accordance with the table of values prescribed.

2. Business tax – is one imposed upon the privilege to conduct or operate a particular trade or business in the LGU in accordance with the Local Tax Code of the LGU.

3. Professional tax – is one imposed by the LGU for those professionals engaged in the active practice of profession in the LGU. Amount is normally P300 for the entire year.

4. Community tax certificate or “sedula” – is imposed upon persons residing in a particular LGU. Residence is the major criteria in these tax but the amount of tax maybe affected by the amount of income earned and the amount of properties owned.

5. Sand and gravel tax – imposed on the extraction of sand and gravel located in the particular LGU.

6. Other taxes imposed by the LGU.

It should be noted that the administration of the Philippines is subdivided into smaller units like province, municipality or city, and barangay and each is referred to as an LGU. Under the Local Government Code, each LGU is empowered to impose a particular tax entrusted to it, and even create such sources of revenue, whether in the form of tax or not.

Finally, a local tax is applied separately and independently from the national internal revenue tax. One or more local and/or national internal revenue taxes may apply to a particular person or entity depending upon the industry and activity it undertakes.