Income Taxation 2019 Edition by Banggawan (Book)

Chapter 2: Taxes, Tax Laws, and Tax Administration

Taxation Law

- Refers to ANY LAW that arises from the exercise of the taxation power of the state.
A) Types of tax law

 Tax Laws
 Laws that provide for the assessment and collection of taxes.
 National Internal Revenue Code
 Tariff and Customs Code
 Local Tax Code
 Real Property Tax Code

 Tax Exemption Laws

 Laws that grant certain immunity from taxation
 Minimum Wage Law
 Omnibus Investment Code of 1987 (E.O. 226)
 Barangay Micro-Business Enterprise (BMBE) Law
 Cooperative Development Act

B) Sources of Taxation Laws

 Constitution
 Statutes and Presidential Decrees
 Judicial Decisions or Case Laws
 Executive Orders and Batas Pambansa (EO and BP)
 Administrative Issuance
 Local Ordinances
 Tax Treaties and conventions with foreign countries
 Revenue Regulations

Types of Administrative Issuances

1) Revenue Regulations
- Issuances signed by the Secretary of Finance
- Upon recommendation of the Commissioner of Internal Revenue
- That specifies, prescribe or define rules and regulations for the effective enforcement of
provisions of the National Internal Revenue code and related statutes.
- They are formal pronouncements intended to clarify or explain the tax law and carry into effect
its general provisions by providing details of administration and procedure.
- Has the force and effect of a law, but intend to expand or limit the law’s application; otherwise
it is VOID.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

2) Revenue Memorandum Orders (RMOs)

- Issuances
 That provide Directives or instructions
 Prescribe guidelines
- It outlines
 Processes
 Operations
 Activities
 Workflows
 Methods
- Procedures necessary in the implementation of
 Stated policies
 Goals
 Objectives
 Plans
 Programs of the Bureau of all areas of operations except auditing.

3) Revenue Memorandum Rulings (RMRs)

- Rulings, opinions and interpretation of the CIR with respect to the provisions of the Tax Code
and other tax laws
- As applied to specific set of facts, with or without precedents (guides)
- Which the CIR may issue from time to time for the purpose of providing taxpayers guidance on
tax consequences in specific situations.
 BIR rulings CANNOT contravene issued RMRs otherwise the rulings are null and void
ab initio.

4) Revenue Memorandum Circulars (RMCs)

- Issuances that publish pertinent (relevant or relatable) and applicable portions as well as
amplifications (increases) of laws, rules and regulations and precedents issued by BIR and other
agencies/offices.

5) Revenue Bulletins (RB)

- Refer to periodic issuances, notices and official announcements of the Commissioner of internal
revenue
- that consolidate (combine) the BIR’s position on certain specific issues of law or administration
- In relation to the provisions of the Tax Code, relevant tax laws, and other issuances for the
guidance of the public.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

6) BIR Rulings
- Official positions of the BIR to queries (inquiries) raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws
- Merely advisory or information service to taxpayer such that none of them is binding except to
the addressee (receiver) and may be reversed by the BIR at any time.

Types of Rulings

1) VAT value added tax rulings

2) ITAD international tax affairs division rulings
3) BIR rulings
4) DA Delegated Authority Rulings

GAAP vs. Tax Laws

- GAAP are not laws but mere conventions (agreements) of financial reporting
- Tax laws includes rules, regulations and rulings prescribe (set) the criteria for tax reporting
(A special form of financial reporting)
- GAAP is intended to meet the common needs while Tax laws are to meet specific needs of tax
authorities.
- Taxpayers normally follow GAAP in recording transactions in their books
- Taxpayers are mandated (required) to follow tax law in preparation and filing of tax returns in
cases of conflict with GAAP.

Nature of the Philippine Tax Laws

- Civil and NOT political in nature.

- Effective even during periods of enemy occupation
- They are laws of occupied territory
- Tax payments made during enemy occupation is valid

Internal Revenue Laws

- Not penal (disciplinary) in nature

- They do not define crime
- Their penalty provisions are merely intended to secure taxpayer’s compliance.

Tax

- Enforced proportional contribution levied (imposed) by the lawmaking body of the state
- To raise revenue for public purpose.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Elements of a Valid Tax

1) Must be levied by the taxing power having jurisdiction over the object of taxation
2) Must not violate constitutional and inherent limitations
3) Must be uniform and equitable
4) Must be for public purpose
5) Must be proportional in character
6) Must be generally payable in money

Classification of Taxes

A) As to Purpose
 Fiscal or Revenue Tax (imposed for general purpose)
 Regulatory (to regulate business conduct acts and transactions)
 Sumptuary (levied to achieve some social or eco objective)

B) As to Subject Matter
 Personal, Poll or Capitation (tax to residents of a particular territory)
 Property Tax (tax on properties, real or personal)
 Excise or Privilege Tax
(Tax imposed upon the performance of an enjoyment of a privilege or engagement in
an occupation)

C) As to Incidence
 Direct Tax
 When both impact and incidence of taxation rest upon the SAME taxpayer
 The statutory (legal) taxpayer is the economic taxpayer
 Indirect Tax
 When tax is paid by any person OTHER THAN the one intended to pay the same
 Occurs in cases of business taxes where the statutory is not the economic taxpayer
 Statutory taxpayer is named by the law to pay the tax
 Economic Taxpayer is the one that actually pays the tax

D) As to amount
 Specific Tax
 Tax of a fixed amount imposed on a PER UNIT basis (per kilo, meter etc.)
 Ad Valorem
 Tax of a fixed proportion imposed upon the VALUE of the tax object

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

E) As to Rate
 Proportional Tax
 Flat or fixed rate tax
 Use of this emphasizes (highlights) EQUALITY as its subjects all with the SAME rate
regardless of their ability to pay
 Progressive or Graduated Tax
 Imposes increasing rates as tax base increases
 Use of this results in EQUITABLE taxation because it gets more tax those who are
more capable (rich) than the poor
 Regressive Tax
 Decreasing rates as tax base increases
 Opposite of progressive and regarded as ANTI POOR
 Violates the constitutional guarantee of progressive taxation
 Mixed Tax
 Tax manifest tax rates
 Combination of any of the above types of tax

F) As to imposing authority
 National Tax (imposed by national government)
 Income Tax (on annual income, gains and profits)
 Estate Tax (on transfer of properties of a decedent upon DEATH)
 Donor’s Tax (transfer of properties by LIVING donor)
 VAT (consumption tax collected by VAT business taxpayers)
 Other Percentage Tax (collected by Non-VAT business taxpayers)
 Excise Tax (for SIN products and non-essential commodities)
^ must be differentiated from PRIVILEDGE tax which is also excise tax
 Documentary Stamp Tax
^ Tax on documents or instruments evidencing acceptance, assignment, sale or
transfer of an obligation, right or property etc.
 Local Tax (imposed by municipal or local government)
 Real Property Tax
 Professional Tax
 Business Tax, Fees and Charges
 Community Tax
 Tax on Banks and other financial institutions

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Distinction of Taxes with similar terms

1) Tax vs. Revenue

- Amount IMPOSED is tax and amount COLLECTED is revenue by government.
2) Tax vs. License Fee
- Tax has broader subject
- Tax emanates (originates) from taxation power imposed upon any object
- License Fee emanates from police power and imposed to REGULATE the exercise of a privilege
such as commencement of a business or a profession.
- Tax is imposed AFTER business commencement while License is BEFORE
- Tax is post-activity imposition while License is pre-activity imposition

3) Tax vs. Toll

- Tax is levy of government and a demand of sovereignty (power)
- Tax depends upon the needs of the government
- Toll is charged for the use of other’s property and a demand of ownership
- Toll depends upon the value of the property leased
- Both government and private entities impose toll but ONLY government can impose tax

4) Tax vs. Debt

- Tax arises from law while debt arises from private contracts
- Non-payment of tax leads to imprisonment while debt does not
- Debt can be subject to set off while tax is not
- Debt can be paid in kind (dacion en pago) while tax is generally payable in money
- Tax draws interest only when taxpayer is delinquent while debt draws interest when it is
stipulated in the contract or when debtor incurs delay

5) Tax vs. Special Assessment

- SA is imposed on land only while tax is upon persons, property or privileges
- Basis of SA is the benefit in terms of the appreciation in land value caused by public
improvement while tax is levied without expectation of direct benefit
- SA does not become a personal obligation of the land owner and would NOT result to
imprisonment

6) Tax vs Tariff
- Tax is broader and tariff is imposed only on imported on exported commodities.

7) Tax vs. Penalty

- Tax is for the support of the government while penalty is to discourage an act
- Penalty can be imposed by both government and private entities while tax is for gov only
- Penalty may arise from both law or contract while tax is only from law only

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Tax System

- Methods or schemes if imposing, assessing and collecting taxes

- Includes all the tax laws and regulations, means of their enforcement and government offices,
bureaus and withholding agents
- Which are part of the machineries of the government in tax collection
- Philippine tax system is subdivided into 2
 National Tax system
 Local Tax system
- Types of Tax systems
A) According to Imposition
 Progressive (employed in income of individuals and transfer of properties)
 Proportional (employed in taxation of corporate income and business)
 Regressive (not employed in the Philippines)
B) According to Impact
 Progressive
 Emphasizes DIRECT tax and cannot be shifted
 Encourages economic efficiency
 it leaves no other resort for taxpayers than to be efficient
 Impacts more upon the RICH
 Regressive
 Emphasizes INDIRECT taxes
 Shifted by businesses to consumers and it is ANTIPOOR
^ It is believed that the Philippines have a dominantly regressive tax system despite
the constitutional guarantee of progressive taxation due to the prevalence
(occurrence) of business taxes.

Tax Collection systems

A) Withholding system on income tax

- Payer deducts the tax on income BEFORE giving it to the payee and then remits it to the gov.
 Creditable withholding tax
 Withholding tax compensation
^ estimated by gov that employers will withheld against employee compensation
income
^intended to support the self-assessment to LESSEN the burden of lump sum tax
payment of taxpayer
^also provides for a possible 3rd party check for the BIR to check non-compliance
taxpayers
 Expanded Withholding Tax
^ estimated by gov to be deducted on certain income payments made by taxpayers
engaged in business

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

 Final Withholding Tax

 System wherein payors are required to deduct the FULL TAX on certain income
payments
 Intended for the collection on income with HIGH RISK of non- compliance

Similarities of Creditable and final

- On both cases, payor withholds a fraction of the income then remits in to gov
- By collecting at the moment cash is available, both serve to minimize flow problems to the
taxpayer and collection problems of the government

B) Withholding system on business tax

- When national government purchases from private suppliers
- Law required withholding of the relevant business tax

C) Voluntary Compliance System

- Self-assessment method
- Taxpayer himself determines his income, reports it then pays the tax to government
 Tax here will be reduced by
 Withholding tax on compensation withheld by employers
 Expanded withholding taxes withheld by suppliers for goods or services
- Taxpayer shall pay the government any tax balance after credit and claim refund or tax credit
for excessive tax withheld

D) Assessment or Enforcement system

- Government identifies non-compliance taxpayers,
- Assesses their tax dues including penalties
- Demand their voluntary compliance or
- Enforce collection by coercive (strong) means such as summary proceeding or judicial
proceedings if necessary.

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Principles of sound tax system

- Adam Smith, government should adhere (follow) these to evolve a sound tax system
1) Fiscal Adequacy
 Sources of funds must be enough to cover costs or else the government will be
paralyzed.
2) Theoretical Justice or Equity
 Should consider taxpayer’s ability to pay cause should not be oppressive or unjust
3) Administrative Feasibility
 Tax laws should be capable of effective administration to encourage compliance
 Should make it easy to comply by avoiding administrative bottlenecks (blockages)
and compliance costs
 Applications of this
^ E-filing and payment
^ Substituted Filing systems for employees
^ Final withholding tax on non-resident aliens
^ Accreditation (authorization) of authorized agent banks in filing and payment of taxes

Tax Administration

- Management of the tax system

- National tax system is entrusted to the BIR under the supervisions and administration of the
department of finance

Chief Officials of the BIR

1) 1 Commissioner
2) 4 Deputy Commissioners
 Operations Group
 Legal Enforcement Group
 Information System Group
 Resource Management Group

Powers of the BIR

1) Assessment and Collection

2) Enforcement of all forfeitures, penalties and fines and judgment in all cases favored by court
3) Giving Effect to and administering supervisory and police powers
4) Provision and distribution of documents to proper officials
5) Issuance of receipts and clearances
6) Assignment of internal officers and employees to other duties
7) Submission of annual report to congress

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Powers of the Commissioner (45-47)

1) Interpret the provisions of the NIRC that will be reviewed by the Secretary of finance
2) To decide tax cases subject to exclusive appellate jurisdiction
3) To obtain information and to summon, examine and take testimonies of persons to effect tax
collection
4) To make assessment and prescribe additional requirement for tax administration and
enforcement
5) To examine tax returns and determine tax due thereon
6) To conduct inventory taking and surveillance
7) To prescribe presumptive gross sales and receipts for taxpayers when they fail to issue receipts
or their declaration of return is not correct
8) To terminate tax period
9) To prescribe real property values (zonal value)
10) To comprise tax liabs of taxpayers
11) To inquire into bank deposits
12) To Accredit and register tax agents
13) To refund or credit internal revenue taxes
14) To cancel tax liabs on certain cases
15) To prescribe (recommend) additional procedures or documentary requirements
16) To delegate his powers to any subordinate officer

Non-delegated power of the CIR

1) Power to recommend promulgation (declaration) of rules and regulations to the secretary

2) Power to issue rulings of first impression to reverse existing rulings of the bureau
3) Power to comprise or abate any tax liability
4) Power to assign or reassign officers

Rules in assignments of revenue officers to other duties

1) Officers cannot stay in establishments where excisable articles are kept for more than 2 years
2) Cannot remain in the same assignment for more than 3 years
3) Assignment to special duties shall not exceed 1 year

Agents and Deputies for the collection of NIR taxes

1) Commissioner of customs and subordinates

2) Head of the appropriate government offices and his subordinates
3) Banks duly accredited by the commissioner

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Other agencies tasked with tax collections or incentives

1) Bureau of customs
- Tasked to administer collection of tariffs and the VAT on importation
2) Board of Investments
- Tasked to lead the promotion of investments in the Philippines by helping Filipinos and
foreigner to venture in desirable areas of eco activities

3) Philippine Economic Zone Authority

- Created to promote investment in export-oriented manufacturing industries in the Philippines
- Supervises the grant pf both fiscal and non-fiscal incentives
- Their enterprises enjoy tax holidays and is also an attached agency of the DTI

Local Government Tax Collecting Units

- Provinces, municipalities, cities and barangays also impose taxes to rationalize their fiscal
autonomy

Taxpayer classification for purposes of tax administration

1) Large taxpayers
- Under supervision of the Large taxpayers services of the BIR national office, their criteria

A) As to payment
 VAT 200,000 per quarter for the preceding year
 Excise 1 million tax paid for the preceding year
 Income 1 million annual income tax paid for the preceding year
 Withholding 1 million annual withholding tax payment
 Percentage 200,000 per quarter for the preceding year
 Documentary Stamp 1 million aggregate amount per year

B) As to Financial Conditions and results of operations

 Gross Receipts or sales 1 million total annual gross sales or receipts
 Net worth 300m total net worth at the close of each calendar year
 Gross Purchases 800m total annual purchases for the preceding year
 Top Corporate Taxpayer listed and published by the SEC

2) Non-Large Taxpayers
- Under the supervision of the respective revenue district offices where the taxpayer is situated

Abraham D. Chin
 Income Taxation 2019 Edition by Banggawan (Book)

Automatic classification of taxpayers as large taxpayers

1) All taxpayers under large taxpayer’s service

2) Group of companies of a large taxpayer
3) Surviving company in case of merger or consolidation of a large taxpayer
4) Corporation that absorbs a large taxpayer company
5) Corp with authorized capitalization 300m with SEC
6) Multinational enterprise with 300m authorized capitalization
7) Publicly listed Corp
8) Universal, commercial and foreign banks
9) Corporate taxpayers with at least 100m authorized capital in banking, insurance etc.
10) Corporate Taxpayers engaged in production of metallic materials

Abraham D. Chin