ONLINE LEARNING MODULE

TAXN 1016 (Income Taxation)

Academic Year 2020-2021

Lesson 2: Taxes, Tax Laws and Tax Administration

Topic: Taxes, Tax Laws and Tax Administration

A. Sources of Tax Laws
B. Characteristics of Tax and its kinds
C. Power of the BIR and its Commissioner
D. Other Taxing Body and its power

Learning Outcomes: At the end of this module, you are expected to identify sources of taxes, tax laws
and the exercise of power to tax

LEARNING CONTENT

Introduction:
After learning the general concepts of taxation and understanding its application to Philippine Taxation
system, we are ready to comprehend and demonstrate the basis of all these concepts. We will be dealing on
taxes, tax laws and the administration of the tax system.

Lesson Proper

We first define taxation law as any law that arises from the exercise of the taxation power of the state
which is geared towards raising of funds primarily to finance government projects for public consumption.

Types of taxation laws

1. Tax laws – laws that provide for the assessment and collection of
taxes
a. National Internal revenue Code (NIRC)
b. Tariff and Customs Code
c. Local Tax Code
d. Real Property Tax Code

2. Tax exemption laws – laws that grant immunity from taxation

a. Minimum Wage Law
b. Omnibus Investment Code of 1987
c. Barangay Micro Business Enterprise Law
d. Cooperative Development Act

Sources of Taxation Laws

1. Constitution
2. Tax Treaties and Conventions with foreign countries
- The government enters into tax treaties in order to minimize the effect of double taxation.
3. Statutes and Presidential Decrees (executive branch)
4. Executive Orders 9executive branch)
5. Judicial Decision or Case Laws (judicial branch)
6. Local Ordinances (local executive branch)
7. Administrative Issuances (BIR initiated)
a. Revenue Regulations
 issuances signed by the Secretary of Finance, upon recommendation of the BIR Commissioner that
specify, prescribe or define rules and regulations for the effective enforcement of the provisions of
the NIRC
 formal announcements intended to clarify or explain the tax law and carry into effect its general
provisions by providing details of administration and procedure
 it supplements the law but never expand nor limit the application of the law
b. Revenue Memorandum Orders
 Issuances that provide directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in the implementation of
stated policies, goals, objectives, plans and programs of the BIR in all areas of operation except
auditing

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 c. Revenue Memorandum Rulings
 Rulings, opinions and interpretations of the Commissioner of Internal Revenue (CIR) with respect
to the provisions of the Tax Code and other tax laws, as applied to a specific setoff facts and which
the CIR may issue from time to time for the purpose of providing taxpayers guidance on the tax
consequences in specific situations
d. Revenue Memorandum Circulars
 Issuances that publish pertinent and applicable portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR and other agencies or offices.
e. Revenue Bulletins
 Periodic issuances, notices, and official announcements of the CIR that consolidates 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
f. BIR Rulings
 Official positions of the BIR to queries raised by taxpayers and other stakeholders relative to
clarifications and interpretation of tax laws.
 Merely advisory or sort of information service to the taxpayer such that none of them binding except
to the addressee and may be reversed by the BIR at anytime
 It cannot contravene duly issued Revenue Memorandum Rulings
 To summarize, the purpose of rules and regulations are
a. to properly enforce and execute the law
b. to clarify and explain the law
c. to carry into effect the law’s general provision by providing details of administration and
procedure
 the requisites for validity of rules and regulations are
a. they must not be contrary to law and the constitution
b. they must be published in the Official Gazette or a newspaper of general publication (broad
sheet)

COMPARISON between GAAP and TAX LAWS

GAAP TAX LAWS

 mere conventions of financial accounting
 benchmarks for the fair and relevant valuation and  Prescribe the criteria for tax reporting,
recognition of the elements of the financial
statement of a reporting entity for general purpose
financial reporting  a special form of financial reporting which is
 GAAP accounting reports are intended to meet the intended to meet specific needs of tax authorities
common needs of a vast number of users in the
general public  in the preparation and filing of tax returns,
 Followed by taxpayers in recording transactions in taxpayers are mandated to follow the tax laws in
their books cases of conflict with GAAP

Elements of a Valid Tax

Taxes 1. Levied by the taxing power having jurisdiction
over the object of taxation
an enforced proportional 2. Does not violate constitutional and inherent
contribution levied by the limitations
lawmaking body of the 3. Uniform and equitable
State to raise revenue 4. For public purpose
for public purpose. 5. Proportional in character
6. Generally payable in money

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Classification of Taxes
1. As to scope and taxing authority
a. National – imposed by the National Government
i. income tax – tax on annual income, gains or profits
ii. Value Added Tax – consumption tax collected by VAT business taxpayers
iii. Percentage tax - consumption tax collected by non-VAT business taxpayers
iv. Excise tax – tax on sin products and non-essential commodities
v. estate tax – tax on gratuitous transfer of properties by a decedent upon death
vi. donor’s tax – tax on gratuitous transfer of properties by a living person
vii. documentary stamp tax – tax on documents, instruments, loan agreements and papers
evidencing the acceptance, assignment, sale or transfer of an obligation, right or property
incidental thereto.
b. Local – imposed by Local Government units
i. real property tax
ii. professional tax
iii. business taxes, fees, licenses
iv. community tax
v. tax on financial institutions

2. As to subject matter or object

a. Personal, poll or capitation – tax of fixed amount imposed upon individual residing within a specified
territory without regard to their property or occupation in which he may be engaged. (community tax)
b. Property – tax imposed on real or personal property in proportion or in accordance with some
reasonable method of apportionment (real estate tax)
c. Excise – tax on the exercise of certain rights and privileges. A tax imposed upon the performance of
an act, enjoyment of a privilege or engagement in an occupation. It is also a tax imposed on sin
products and non-essential goods such as tobacco, alcohol, sweetened drinks, luxury items.

3. As to who bears the burden

a. Direct – a tax demanded from the person who also shoulders the burden of the tax
(income tax - the person receiving the income is the same person paying the tax)
b. Indirect – a tax demanded from one person in the expectation and intention that he shall indemnify
himself at the expense of another (VAT and percentage are consumer taxes but imposed on sellers)

4. As to the determination of amount

a. Specific – tax of fixed amount imposed by the head of number or by some standard of weight or
measurement (excise tax on tobacco and alcohol products, sweetened drinks, luxury items)
b. Ad valorem – tax of fixed proportion of the value of the property with respect to which the tax is
assessed or ascertained (estate tax, donor’s tax, VAT, percentage tax).

5. As to purpose
a. Primary – General, Fiscal or Revenue – tax imposed solely to raise revenue for governmental
expenditure. (income tax, VAT)
b. Secondary – Regulatory – tax imposed to regulate business, conduct, acts or transaction
c. Sumptuary Purposes – tax imposed for a special purpose such as to achieve some social or economic
ends irrespective of whether revenue is actually raised or not. (custom duties, tariffs)

6. As to graduation or rate
a. Proportional – tax based on a fixed percentage of the amount of the property, receipts or other basis
to be taxed. It emphasizes equality as it subjects all taxpayers with the same rate without regard to
their ability to pay. (VAT)
b. Progressive or graduated – tax rate increases as the tax base increases. The government sets more
tax from those more capable. It aids to lessen the gap between the rich and the poor. (income tax,
estate tax, donor’s tax)
c. Regressive – tax rate decreases as the tax base increases. (not used in the Philippines)
d. Mixed tax – a combination of the three other taxes.

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Tax distinguished from other terms

Revenue – all the funds or income derived by the Tax – enforced contributions from persons and
government whether from tax or any other source property for the support of the government and all
public needs.
 Amount collected  Amount imposed
Toll – a sum of money for the use of something TAX
(roads, bridges or the like, of a public nature),
generally applied to the consideration.
 Demand of proprietorship/ownership  Demand of sovereignty
 Paid for the use of another property  Paid for support of government
 Amount is based on cost of construction or  Amount is based on the necessities of the state
maintenance of the public improvement used
 Imposed by the government or private individuals or  Imposed only by State
entities.

Special Assessment – an enforced proportional .Special assessment is not a tax measure intended to
contribution from owners of lands for special benefits raise revenues for the government because the
resulting from public improvements. proceeds thereof may be devoted to the specific
purpose for which the assessment was authorized.
Characteristics of special assessment
Levied only on land
Not a personal liability of the person assessed
Based wholly on benefits
Exceptional both as to time and place

Penalty - .a sanction imposed as a punishment for .

violation of law or acts deem injurious
 Designed to regulate conduct  Primarily aimed at raising revenue
 Imposed by the government or private individuals or  Imposed only by government
entities.

Permit and License – a charge imposed under the .

police power for purposes of regulation.
 For regulation
 Exercise of police power
 Imposed before engagement in a business or
profession (pre-activity imposition)
 Amount is limited to the necessary expenses of
regulation
 Imposed on the right of reward of an officer for
specific services
 Legal compensation or reward of an officer for
specific services
 Failure to pay license fee makes the act or business
illegal
 For revenue
 Exercise of taxing power
 Imposed after the commencement of a business or
profession (post-activity imposition)
 Generally no limit
 Imposed on persons and property
 An enforced contribution assessed by sovereign
authority to defray public expenses
 Assessed to defray public expenses

Debt – arise from contract Tax – arise from law

 May be paid in kind
 Assignable/maybe the subject of set-off or
compensation
 A person cannot be imprisoned for non-payment of
debt except when it arises from a crime
 Draw interest when stipulated or when description
default
 Generally payable in money
 Cannot generally be assignable/subject of set-off or
compensation
 Imprisonment is a sanction for non-payment of tax
except poll tax
 Does NOT draw interest except when delinquent

Subsidy – a pecuniary aid directly granted the Subsidy is not a tax although tax may have to be
government to an individual or private commercial imposed to pay it.
enterprise deemed beneficial to the public.

Tariff or Custom Duties – taxes imposed on goods .Taxes include customs duties
exported from or imported into a country

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Tax System
- The methods or schemes of imposing, assessing and collecting taxes.
- The machineries of the government in tax collection include
a. All tax laws and regulations
b. the means of their enforcement
c. government offices, bureaus and withholding agents

Types of Tax System

1. Proportional – employed in corporate income taxation and business taxation
2. Progressive – employed in individual income taxation and transfer taxation
- It emphasizes direct taxes which cannot be shifted
- It encourages economic efficiency as it leaves no other resort to taxpayers than to be efficient
- It impacts more upon the rich
3. Regressive – not employed in the Philippines
- Emphasizes indirect taxes, a tax that is shifted by businesses to consumers
- The impact is upon the bottom end of society or the poor.

Tax Collection System

1. Withholding system - the payor of the income deducts the tax on the income before releasing the balance
to the payee and remits the same to the government.
a. Withholding tax on compensation – a tax withheld by employer from payments of compensation
income to employees. (ex. Income tax for Individuals)
b. Expanded withholding tax – a withholding tax prescribed on certain income payments and is
creditable against the income tax due of the payee for a particular period for which the income was
earned (ex. business tax)
c. Final withholding tax – a withholding tax prescribed on certain payments and is not creditable against
any income tax due of the payee for the taxable year. (ex. interest on bank deposits)
d. Withholding tax on government payments tax withheld by government agencies and its
instrumentalities including government owned and controlled corporations on their payments to
taxpayers, suppliers or other payees.

2. Voluntary Compliance System (self- assessment method) – the taxpayer himself determines his income,
reports the same through the income tax return and pays the tax to the government.
- Should there been a portion of the tax payable being withheld through withholding tax on
compensation or expanded withholding tax, said withheld taxes are treated as tax credit (deduction)
against the tax due of the taxpayer in the income tax return. The remaining balance thereof will only
be the amount remitted to the government.

3. Assessment or Enforcement System – the government identifies non-compliant taxpayers, assess their tax
dues and penalties and enforces collection by coercive means.

Principles or Elements of Sound Taxation

1. Fiscal Adequacy – the sources of government funds must be sufficient to cover government costs, leaving
no deficit so as not to paralyze the government’s efficient delivery of essential public service to the people.

2. Theoretical Justice – the tax burden should be proportionate to the taxpayers’ ability to pay, not
oppressive, unjust or confiscatory.

3. Administrative Feasibility – Tax laws must be capable of effective and efficient enforcement to encourage
compliance. The application of administrative feasibility in our current tax system include
a. Electronic filing and e-payment of taxes
b. Substituted filing system for employees – in as much as the employer withholds the correct tax due
and remits the same monthly, he therefore files and submits the duly accomplished annual tax return
of the employee.
c. Final withholding tax on non-resident aliens or corporations
d. Accreditation of authorized agent banks in the filing and payment of taxes.

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Tax Administration
- The management of the tax system.
- Entrusted to the BIR under the supervision and administration of the Department of Finance
- Chief officials of the BIR are
a. Commissioner
b. Deputy Commissioner for Operations
c. Deputy Commissioner for Legal enforcement
d. Deputy Commissioner for Information System
e. Deputy Commissioner for Resource Management

Powers of the BIR

1. Assessment and collection of Taxes
2. Enforcement of all forfeitures, penalties, fines and judgments in all cases decided in its favour by the
courts
3. Giving effects to and administering the supervisory and police powers conferred to it by the NIRC and
other laws.
4. Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution to proper officials of forms, receipts, certificates, stamps, etc.
6. Issuance of receipts and clearances
7. Submission of annual report, pertinent information to Congress and reports to the Congressional
oversight Committee in matters of taxation

Powers of the Commissioner of Internal Revenue

1. To interpret the provisions of the NIRC, subject to the review by the Secretary of Finance
2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals such as
disputed assessments, refunds of internal revenue taxes, fees, or other charges, penalties imposed, etc
3. To obtain information and to summon, examine and take testimony 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 or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when
a. The taxpayer failed to issue receipt
b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the
declaration in the return
8. To terminate tax period when the taxpayer is
a. Retiring from business
b. Intending to leave the Philippines
c. Intending to remove, hide or conceal his property
d. Intending to perform any act tending to obstruct the proceedings for the collection of the tax or render
the same ineffective
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer’s claim of financial incapacity to pay in an application for tax compromise
(note: inquiry can proceed only if the taxpayer waves his privilege under the Bank Deposit Secrecy
Law.)
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 12. To accredit and register tax agents
- Agents and Deputies for collection of National Internal Revenue Taxes
a. The Commissioner of Custom and his subordinates with respect to collection of national internal
revenue taxes on imported goods
b. The head of appropriate government offices and his subordinates with respect to the collection of
energy tax
c. Banks duly accredited by the Commissioner with respect to receipts of payments of internal
revenue taxes authorized to be made thru authorized government depositary banks

13. To refund or credit internal revenue taxes

14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary requirements
16. To delegate his powers to any subordinate officers with rank equivalent to a division chief of an office.

Non-delegated power of the CIR

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance
2. The power to issue rulings if first impression or to reverse, revoke or modify any existing rulings of the
Bureau
3. The power to compromise or abate any tax liability.
Exception: the Regional Evaluations Board (compose of the Regional Director as chairman, Assistant
Regional Director, heads of the Legal, Assessing and Collection division and Revenue District Officer
having jurisdiction over the taxpayer) may compromise tax liabilities under the following:
a. Assessment are issued by the regional offices involving basic deficiency tax of P500,000 or less
b. Minor criminal violations discovered by the regional and district officials
4. The power to assign and reassign internal revenue officers to establishments where articles subject to
excise tax are produced or kept.
- Rules in the assignment of revenue officers to other duties
a. Revenue officers assigned to an establishments where excisable articles are kept shall in no case
stay there for more than 2 years
b. Revenue officers assigned to perform assessment and collection function shall not remain in the
same assignment for more than 3 years
c. Assessment of internal revenue officers and employees of the Bureau to special duties shall not
exceed one year.

Other agencies tasked with Tax Collection or Tax Incentive Related Functions
a. Bureau of Customs – administers collection of tariffs on imported articles and collection of VAT on
importation.
b. Board of Investments – tasked to lead the promotions of investments in the Philippines by assisting
Filipinos and foreign investors to venture and prosper in desirable areas of economic activities. It also
supervises the grant of tax incentives under the Omnibus Investment Code
c. Philippine Economic Zone Authority – promote investments in export-oriented manufacturing industries
in the Philippines and among other myriads of functions, supervise the grant of both fiscal and non-fiscal
incentives.
PEZA registered enterprises enjoy tax holidays for certain years, exemption from import and export
taxes including local tax.
d. Local Government Tax Collecting Unit – impose and collect various taxes to rationalize their fiscal
autonomy.

Taxpayer Classification for Tax Administration Purposes

a. Large Taxpayer – under the supervision of the Large Taxpayer service of the BIR
b. Non-large Taxpayer – supervised by the Revenue District Officer where the business, trade or profession
is situated.

The criteria for determining large taxpayers are

A. As to payment
1. Value Added Tax – at least P200,000 per quarter for the preceding year
2. Excise Tax – at least P1 Million tax paid for the preceding year
3. Income Tax – at least P1 Million annual income tax paid for the preceding year
4. Percentage Tax – at least P200,000 percentage tax paid or payable per quarter for the preceding year
5. Documentary Tax – at least P1 Million aggregate amount per year.
6. Withholding Tax – at least P1 Million annual withholding tax payments or remittances from all types of
withholding taxes
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 B. As to financial condition and result of operation
1. Gross Receipts or Sales – P1 Billion total annual gross sale or receipts
2. Net Worth – P300 Million total net worth at the close of each calendar or fiscal year
3. Gross Purchases – P800 Million total annual purchases for the preceding year
4. Top corporate taxpayer listed and published by the Securities and Exchange Commission

The following are automatically classified as large taxpayers upon notice in writing by the CIR:
1. All branches of taxpayer under the Large Taxpayer Service
2. Subsidiaries, affiliates and entities of conglomerates or group of companies of a large taxpayer
3. Surviving company in case or merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of a spin-off of any large taxpayer
5. Corporation with authorized capitalization of at least P300 Million registered with the SEC.
6. Multinational enterprises with an authorized capitalization or assigned capital of at least P300 Million
7. Publicly listed corporations
8. Universal, commercial and foreign banks
9. Corporate taxpayers with at least P100 Million authorized capital in banking, insurance,
telecommunication, utilities, petroleum, tobacco and alcohol industries
10. Corporate taxpayers engaged in the production of metallic metals.

*** END of LESSON 1***

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