ic es, Tax Laws and Tax Administration € 2 TAXES, TAX LAWS, AND TAX ADMINISTRATION Chapter Overview and Objectives This Chapter discusses tax laws, taxes, and their distinction from similar items, and the administration of the tax system. After this chapter, readers are expected to comprehend and demonstrate knowledge on the following: ‘The type of taxation laws Distinction among tax laws, revenue regulations, and rulings Tax, its elements, and classifications Distinction of tax from similar items Tax system and its types The principles ofa sound tax system How tax is administered The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of Internal Revenue (CIR) and the non-delegated powers of the CIR The criteria for selection of large taxpayers SX onewene 2 TAXATION LAW Taxation law refers to any law that arises from the exercise of the taxation power of the State. Types of taxation laws 1. Tax laws ~ These are laws that provide for the assessment and collection of taxes. Examples: a. The National Internal Revenue Code (NIRC) b. ‘The Tariff and Customs Code c. The Local Tax Code d. The Real Property Tax Code 2. Tax exemption laws - These are laws that grant certain immunity from taxation. b. The Omnibus Investment Code of 1987 (E.0. 226) c. Barangay Micro-Business Enterprise (BMBE) Law d. Cooperative Development Act 35Chapter 2 - Taxes, Tax Laws and Tax Administration Sources of Taxation Laws Constitution Statutes and Presidential Decrees Judicial Decisions or case laws Executive Orders and Batas Pambansa Administrative Issuances Local Ordinances ; ‘Tax Treaties and Conventions with foreign countries Revenue Regulations PN AVF Ne Types of Administrative Issuances Revenue regulations Revenue memorandum orders Revenue memorandum rulings Revenue memorandum circulars Revenue bulletins BIR rulings ON een Revenue Regulations are issuances signed by the Secretary of Finance upy recommendation of the Commissioner_of Internal_Revenue (CIR) that speci prescribe, or define rules and regulations for the effective enforcement of th provisions of the National Internal Revenue Code (NIRC) and related statutes. Revenue regulations are formal_pronouncements intended to clarify or explain thet law and carry into effect its general provisions by providing details of administrat and procedure. Revenue regulation has the force_and_effect_of a law, but is nr intended to expand or limit the application of the law; otherwise, it is void." Revenue Memorandum Orders (RMOs) are issuances that provide directives ¢ instructions; prescribe guidelines; and outline processes, operations, activiti: workflows, methods, and procedures necessary in the implementation_of sta policies, goals, objectives, plans, and programs of the Bureau in all areas of operative except auditing. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of? .CIR with respect to the provisions of the Tax Code and other tax laws as applied specific set of facts, with or without established precedents, and which the CIR @™ issue from time to time for the purpose of providing taxpayers guidance on the Y consequences in specific situations. BIR Rulings, therefore, cannot contravene issued RMRs; otherwise, the Rulings are null and void ab initio. Revenue Memorandum Circulars (RMCs) are issuances that publish_pertinest * applicable portions as well as amplifications of laws, rules, regulations, and precel® issued by the BIR and other agencies/offices. 2 36Tax Administration ins (RB) refer to periodic issuances, notices, and official announcements the Commissioner of Internal Revenue that consolidate the Bureau of Internal e's position on certain specific issues of latw or administration in relation to the jons of the Tax Code, relevant tax laws, and other issuances for the guidance of 195 are official positions of the Bureau to queries raised by taxpayers and seholders relative to clarification and interpretation of tax laws. ; visory or a sort of information service to the taxpayer such that of them is binding except to the addressee and may be reversed by the BIR at ytime. Types of rulings 1. Value Added Tax (VAT) rulings 2. International Tax Affairs Division (ITAD) rulings . BIR rulings 4. Delegated Authority (DA) rulings Generally Accepted Accounting Principles (GAAP) vs. Tax Laws Generally accepted accounting principles or GAAP are not laws, but are mere conventions of financial reporting. They are benchmarks for the fair and relevant valuation and recognition of income, expense, assets, liabilities, and equity of a reporting entity for general purpose financial reporting. GAAP accounting reports are intended to meet the common needs of a vast number of users in the general public. Tax laws including rules, regulations, and rulings prescribe the criteria for tax needs of tax authorities. Taxpayers normally follow GAAP in recording transactions in their books. However, in the preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of conflict with GAAP. NATURE OF PHILIPPINE TAX LAWS Philippine tax laws are civil and not political in nature. They are effective even during periods of enemy occupation. They are laws of the occupied territory and not by the occupying enemy. Tax payments made during occupations of foreign enemies are valid. Our internal revenue laws are not penal in nature because they do not define crime. Their penalty provisions are merely intended to_ secure taxpayers’ compliance. 37Chapter 2 - Taxes, Tax Laws and Tax Administration TAX r Tax is an enforced proporti onal contribution levied by the lawmaking body of thy State to raise revenue for public purpose. Elements of a Valid Tax 1, 2. 3. 4& F 6. “Tax must be levied by the taxing power having jurisdiction over the object Tas not violate Constitutional and inherent limitations. Tax must be uniform and equitable. ‘Tax must be for public purpose. Tax must be proportional in character. Tax is generally payable in money. Classification of Taxes A. As to purpose 1. Fiscal or revenue tax - a tax imposed for general purpose 2. Regulatory - a tax imposed to regulate business, conduct, acts transactions 3. Sumptuary - a tax levied to achieve some social or economic objectives B. As to subject matter € D. As to amount 1. Personal, poll or capitation - a tax on persons who are residents of a particular territory 2. Property tax - a tax on properties, real or personal 3. Excise or privilege tax - a tax imposed upon the performance of an a¢, enjoyment of a privilege or engagement in an occupation As to incidence 1. Direct tax - When both the impact and incidence of taxation rest upon the same Eaiayer the tax is said to be direct. The tax is collected from the Person who is intended to pay the same. The statuto is the economic taxpayer, ny apeveE 2. Indirect tax - When the tax is is intended to pay the same, the case of business taxes economic taxpayer. The statutory taxpayer is the economic taxpayer is the one wI paid by any person other than the one wht the tax is said to be indirect, This occurs i where the statutory taxpayer is not ti Person named by law to pay the tax. At ho actually Pays the tax, 1. Specific tax - a tax of OU asis such # a fixed am i i i : i af int imposed on a per unit basi 38Chapter 2 - Taxes, Tax Laws and Tax Administration i ae valorem - a tax of a fixed Proportion imposed upon the value of the tax object E£. Astorate Ai Proportional tax ~ This is a flat or fixed rate tax. The use of proportional tax emphasizes equality as it subjects all taxpayers with the same rate without regard to their ability to pay. Progressive or graduated tax - This is a tax which imposes increasing rates as the tax base increase. The use of progressive tax rates results in equitable taxation because it gets more tax to those who are more capable. Itaids in lessening the gap between the rich and the poor. Regressive tax ~ This tax imposes decreasing tax rates as the tax base increase. This is the total reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly violates the Constitutional guarantee of progressive taxation, Mixed tax - This tax manifest tax rates which is a combination of any of the above types of tax. F._ As to imposing authority A. National tax - tax imposed by the national government Examples: a. Income tax - tax on annual income, gains or profits b, Estate tax - tax on gratuitous transfer of properties by a decedent upon death c. Donor’s tax - tax on gratuitous transfer of properties by a living donor d. Value Added Tax - consumption tax collected by VAT business taxpayers e. Other percentage tax - consumption tax collected by non-VAT business taxpayers f. Excise tax - tax on sin products and non-essential commodities such as alcohol, cigarettes and metallic minerals. This should be differentiated with the privilege tax which is also called excise tax. g. Documentary stamp tax - a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. Local tax - tax imposed by the municipal or local government Examples: a. Real property tax b. Professional tax c. Business taxes, fees, and charges 39Chapter 2 - Taxes, Tax Laws and Tax Administration nd other financial institutions d, Community tax e, Taxon banks a DISTINCTION OF TAXES WITH SIMILAR ITEMS Tax vs. Revenue Tax refers to the amount imposed by the i refers to all income collections of the government whi licenses, toll, penalties and others. The amount imposed is: collected is revenue. government for public purpos ch includes ta tax but the Tax vs. License fee ‘Tax has a broader subject than license. imposed upon any object such as persons, properti revenue. nates from taxation power ang 5, or privileges to raj, ‘Tax en License fee emanates from police power and is imposed to regulate the exercise » a privilege such as the commencement of a business or a profession. ‘Taxes are imposed after the commencement of a business or profession wheres, license fee is imposed before engagement in those activities, In other words; tay; a post-activity imposition whereas license is a pre-activity imposition. Tax vs. Toll Tax is a levy of government; henee, it is a demand of sovereignty. Toll is a charg for the use of other's property; hence, it isa demand of ownership. The amount of tax depends upon the needs of the government, but the amount¢ toll is dependent upon the value of the property leased, Both the government and private entities impose tol but private entities canm: S |, but pri pi private entiti Tax vs. Debt ises from private contracts, leads to imprisonment, but non- a lead tein nyecemonn i 5 Payment of debt does not lead to imprisonment. Debt can be subject to Set-off but tax i: x is id i i ion & ago) but tax is generally payable in orig Aiba Hea kine ca Tax vs i when te ap arpa the taxpayer is delinquent, Debt draws interé legal delay, 'y the contracting parties or when the debtor incurs! 40Chapter 2 - Taxes, Tax Laws and Tax Administration Tax vs. Special Assessment Tax is an amount imposed upon persons, properties, or privileges. Special assessment is levied by the government on lands adjacent to a public improvement. It is imposed on land only and is intended to compensate the government for a part of the cost of the improvement. ‘The basis of special assessment is the benefit in terms of the appreciation in land value caused by the public improvement. On the other hand, tax is levied without expectation of a direct proximate benefit. Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of the land owner. Therefore, the non-payment of special assessment will not result to imprisonment of the owner (unlike in non-payment of taxes). Tax vs. Tariff Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or properties. Tariff is the amount imposed on imported or exported commodities. Tax vs. Penalty Tax is an amount imposed for the support of the government. Penalty is an amount imposed to discourage an act. Penalty may be imposed by both the government and private individuals. It may arise both from law or contract whereas tax arises from law. ‘TAX SYSTEM ‘The tax system refers to the methods or schemes of imposing, assessing, and collecting taxes. It includes all the tax laws and regulations, the means of their enforcement, and the government offices, bureaus and withholding agents which are part of the machineries of the government in tax collection, The Philippine tax system is divided into two: the national tax system and the local tax system. Types of Tax Systems According to Imposition 1. Progressive - employed in the taxation of income of individuals, and certain local business taxes 2. Proportional - employed in taxation of corporate income and business 3. Regressive - not employed in the Philippines Types of Tax System According to Impact 1. Progressive system? A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be shifted. Hence, it encourages economic efficiency as it leaves no other resort to taxpayers than to be efficient. This type of tax system impacts more upon the rich. 41Chapter 2 - Taxes, Tax Laws and Tax Administration 2. Regressive system izes indirect taxes. Indices A regressive tax system is one that emphasizes indirect taxes, Indirect tay, : the impact of taxation ry, ve shi sinesses to consumers; hence, es, upon the botom end of the society. In effect, a regressive tax system is ay, poor. It is widely believed that despite the Constitutional guarantee of a progress taxation, the Philippines has a dominantly regressive tax system due to tj, prevalence of business taxes. TAX COLLECTION SYSTEMS i i on income tax ~ Under this collection system, the payo, Fe ihe ieee cathhalde or deducts the tax ni the inscrne hetove releasing ty same to the payee and remits the same to the government. The following a, the withholding taxes collected under this system: 1. Creditable withholding tax ° a. Withholding tax on compensation ~ an estimated tax required by th, government to be withheld (ie. deducted) by employers against th compensation income to their employees b. Expanded withholding tax - an estimated tax required by the government to be deducted on certain income payments made by taxpayers engaged in business The creditable withholding tax is intended to support the self-assessment method to lessen the burden of lump sum tax payment of taxpayer and also provides for a possible third-party check for the BIR of non-compliat taxpayers, 2. Final withholding tax - a system of tax collectio nm wherein payors art required to deduct the full tax on certain income pay ~ yments The final withholding tax is inte 1 nded for the collection of taxes from income with high risk of non-comp! liance, Similarities of final tax and creditable withholding tax a. In both cases, the income payor withholds a fraction of the income and remit’ the same to the government. b. By collecting at the m joment cash is available, flow problems to the ta both serve to minimize cast payer arid collection pro| blems to the government. 42_ Chapter 2 - Taxes, Tax Laws and Tax Administration Differences between FWT and CWT Final Withholding Creditable Withholding Ta eo Tax Tncome tax withheld Full Onlyaportion Coverage of Certain passive income Certain passive and active withholding income Who remits the actual Income payor Income payor for the CWT and es the taxpayer for the balance ‘Necessity of income tax Not required Required return for taxpayer B. Withholding system on business tax - when the national government agencies and instrumentalities including government-owned and controlled corporations (GOCCs) purchase goods or services from private suppliers, the law requires withholding of the relevant business tax (i.e. VAT or percentage tax). Business taxation is discussed under Business and Transfer Taxation by the same author. C. Voluntary compliance system ~ Under this collection system, the taxpayer himself determines his income, reports the same through income tax returns and pays the tax to the government. This system is also referred to as the “Self-assessment method.” ‘The tax due determined under this system will be reduced by: a. Withholding tax on compensation withheld by employers b. Expanded withholding taxes withheld by suppliers of goods or services The taxpayer shall pay to the government any tax balance after such credit or claim refund or tax credit for excessive tax withheld. D. Assessment or enforcement system - Under this collection system, the government identifies non-compliant taxpayers, assesses their tax dues including penalties, demands for taxpayer's voluntary compliance or enforces collections by coercive means such as a summary proceeding or judicial proceedings when necessary. PRINCIPLES OF A SOUND TAX SYSTEM According to Adam Smith, governments should adhere to the following principles or canons to evolve a sound tax system: 1. Fiscal adequacy 2. Theoretical justice 3. Administrative feasibility 43_« Tax Laws and Tax Adrninistration Fiscal adequacy Fiscal adequacy requires that the sources of 8 overnment funds must be suffig,, nt must not incur a deficit. A bug. deliver the essential public servi sponse to increase in governin,, to cover government costs. The governme deficit paralyzes the government's ability to the people. Hence, taxes should increase in res spending, phi Theoretical justice - . Theoretical justice or equity suggests that taxation should consider the taxpaye, ability to pay. It also suggests that the exercise of taxation should not 1, oppressive, unjust, or confiscatory. Sonn aire Ae ore ws should be capable of efficient ar; Administrative feasibility suggests that tax law: effective vintitonaticn to encourage compliance. Government should mak easy for the taxpayer to comply by avoiding administrative bottlenecks ay, reducing compliance costs. sh reed tenth b flowy " The following are applications of the principle of admil 1. E-filing and e-payment of taxes 2. Substituted filing system for employees 3. Final withholding tax on non-resident aliens or corporations 4, Accreditation of authorized agent banks for the filing and payment of taxes trative feasibility: TAX ADMINISTRATION Tax administration refers to the management of the tax system. Ta administration of the national tax system in the Philippines is entrusted to tt: Bureau of Internal Revenue which is under the supervision and administration ¢ the Department of Finance. Chief Officials of the Bureau of Internal Revenue 1. 1Commissioner 2, 4 Deputy Commissioners, each to be designated to the following: a. Operations group b. Legal Enforcement group ¢. Information Systems Group d. Resource Management Group POWERS OF THE BUREAU OF INTERNAL REVENUE 1. Assessment and collection of taxes 2. Enforcement of all forfeitures, penalties jt i st decided nits favor by the courts na AS: and judgments in all 5 44