CHAPTER 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 of a 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
8
of the CIR
7
9. The criteria for selection of large
6
taxpayers
5
4
TAXATION LAW
Taxation law refers to any law that arises
3
from the exercise of the taxation power of
2
the State.
1
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.

Examples:
a. The Minirum Wage Lawi
b. The Omnibus Investment Code of 1987
(E.O. 226)
c. Barangay Micro-Business Enterprise
(BMBE) Law
d. Cooperative Development Act

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
Types of Administrative Issuances
. Revenue regulations
. Revenue memorandum orders
. Revenue memorandum rulings
. Revenue memorandum circulars
. Revenue bulletins
6. BIR rulings

Revenue Regulations are Issuances signed

by the Secretary of Finance up
recommendation of the Commissioner of
Internal. Revenue (CIR) that sped
prescribe, or define rules and regulations
for the effective enforcement of d
provisions of the National Internal Revenue
Code (NIRC) and related statutes

Revenue regulations are formal

pronouncements intended to glarify or
explain the t law and carry into effect its
general provisions by providing details of
administryk and procedure. Revenue
regulation has the force and effect of a
law, but isn 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
pecessary in the implementation of stan
policies, goals, objectives, plans, and
programs of the Bureau in all areas of
operatin except auditing

Revenue Memorandum Rulings (RMRs) are

rulings, opinions and interpretations off
_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
al Issue from time to time for the purpose
of providing taxpayers guidance on the l
consequences in specific situations. BIR
Rulings, therefore, cannot contravene di
Issued RMRs; otherwise, the Rulings are
null and void ab initio,

Revenue Memorandum Circulars (RMCs)

are Issuances that publish pertinent *
applicable portions as well as
amplifications of laws, rules, regulations,
and precede Issued by the BIR and other
agencies/offices.

Rovenue Bulletins (RB) refer to periodic

issuances, notices, and official
announcements of the Commissioner of
Internal Revenue that consolidate the
Bureau of Internal Revenue'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.
BIR Rulings are official positions of the
Bureau to queries raised by taxpayers and
other stakeholders relative to clarification
and interpretation of tax laws.

Rulings are merely advisory or a fort of

information service to the taxpayer such
that none of them is binding except to the
addressee and may be reversed by the BIR
at anytime.

Types of rulings
. Value Added Tax (VAT) rulings
. International Tax Affairs Division
(ITAD) rulings
. BIR rulings
. 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
reporting a special form of financial
reporting which is intended to meet
specific peeds 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.

TAX
Tax is an enforced proportional
contribution levied by the lawmaking body
of 1, State to raise revenue for public
purpose.

Elements of a Valid Tax

. Tax must be levied by the taxing
power having jurisdiction over the
object a taxation.
. Tax must 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
. Fiscal or revenue tax - a tax
imposed for general purpose
. Regulatory - a tax imposed to
regulate business, conduct, acts o
transactions
. Sumptuary - a tax levied to
achieve some social or economic
objectives

B. As to subject matter
. Personal, poll or capitation - a tax
 .
on persons who are residents of a
particular territory
. Property tax - a tax on properties,
real or personal
. Excise or privilege tax - a tax
imposed upon the performance of
an ad enjoyment of a privilege or
engagement in an occupation

C. As to incidence
. Direct tax - When both the impact
and incidence of taxation rest upon
th same taxpayer, the tax is said to
be direct. The tax is collected from
the person who is intended to pay
the same. The statutory taxpayer is
the economic taxpayer.
. Indirect tax - When the tax is paid
by any person other than the one
whi Is intended to pay the same, the
tax is said to be indirect. This
occurs! the case of business taxes
where the statutory taxpayer is not
th economic taxpayer.
The statutory taxpayer is the person
named by law to pay the tax. N
economic taxpayer is the one who
actually pays the tax.

D. As to amount
1. Specific tax - a tax of a fixed amount
imposed on a per unit basis such * per kilo,
liter or meter, etc.
2. Ad valorem - a tax of a fixed proportion
imposed upon the value of the tax object

E. As to rate
. 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.
It aids 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
1. 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.

2. Local tax - tax imposed by the municipal

or local government
Examples:
a. Peatessipal tax
b. Professional tax
c. Business taxes, fees, and charges
d. Community tax
e. Tax on banks and other financial
institutions

DISTINCTION OF TAXES WITH SIMILAR

ITEMS
Tax vs. Revenue
Tax refers to the amount imposed by the
goverament for public purpose. Revenu
refers to all income collections of the
government which includes taxes, tarn
licenses, toll, penalties and others. The
amount imposed is tax but the amou
collected is revenue.

Tax vs. License fee

Tax has a broader subject than license. Tax
emanates from taxation power and i
imposed upon any object such as persons,
properties, or privileges to rale revenue.

License fee emanates from police power

and is imposed to regulate the exercise d a
privilege such as the commencement of a
business or a profession.
Taxes are imposed after the
commencement of a business or
profession wherex license fee is imposed
before engagement in those activities. In
other words/taxi a post-activity imposition
whereas license is a pre-activity
imposition.

Tax vs. Toll

Tax is a levy of government; hence, it is a
demand of sovereignty. Toll is a charg for
the use of other's property; hence, it is a
demand of ownership.

The amount of tax depends upon the

needs of the government, but the amount
e toll is dependent upon the value of the
property leased.

Both the government and private entities

impose toll, but private entities canni
impose taxes.

Tax vs. Debt

Tax arises from law while debt arises from
private contracts. Non-payment of u leads
to imprisonment, but non-payment of debt
does not lead to imprisonment Debt can
be subject to set-off but tax is not. Debt
can be paid in kind (dacion & pago) but tax
is generally payable in money.

Tax draws interest only when the taxpayer

is delinquent. Debt draws interd legal
delay.
when it is so stipulated by the contracting
parties or when the debtor incurs'

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. Tarif!
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
. Progressive - employed in the
taxation of income of individuals,
and certain local business taxes
. Proportional - employed in taxation
of corporate income and business
. Regressive - not employed in the
Philippines ggg

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.

2. Regressive system
A regressive tax system is one that
emphasizes indirect taxes. Indirect tate are
shifted by businesses to consumers;
hence, the impact of taxation rend upon
the bottom end of the society. In effect, a
regressive tax system is am
poor.

It is widely believed that despite the

Constitutional guarantee of a progressin
taxation, the Philippines has a dominantly
regressive tax system due to u prevalence
of business taxes.

TAX COLLECTION SYSTEMS

A. Withholding system on income tax -
Under this collection system, the payor of
the income withholds or deducts the tax
on the income before releasing the same
to the payee and remits the same to the
government. The following an the
withholding taxes collected under this
system:
1. Creditable withholding tax
a. Withholding tax on compensation - an
estimated tax required by the government
to be withheld (Le. deducted) by
employers against the compensation
income to their employees
b. Expanded withholding tax - an
estimated tax required by thi government
to be deducted on certain Income
payments made by taxpayers engaged in
business

The creditable withholding tax is intended

to support the self-assessmes 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-compliam taxpayers.

2. Final withholding tax - a system of tax

collection wherein payors an required to
deduct the full tax on certain income
payments
The final withholding tax is intended for
the collection of taxes from income with
high risk of non-compliance.

Similarities of final tax and creditable

withholding tax
● In both cases, the income payor
withholds a fraction of the income
and remo the same to the
government.
● By collecting at the moment cash
is avallable, both serve to minimize
cast flow problems to the taxpayer
and collection problems to the
government.