Module 1

Fundamental Concepts of
Taxation

AETAX1
Taxation

to your first module!

This module is a combination of

synchronous & asynchronous learning
and will last for two weeks

Darwin C. Bonifacio, MBA

Instructor
0956-7182-868
darwinbonifacio.smmc@gmail.com

February 7, 2022
Date Initiated
February 19, 2022
Date of Completion
 FUNDAMENTAL CONCEPTS OF TAXATION
MODULE 1 OUTLINE

MODULE DURATION

I. February 7 to February 19, 2022 Synchronous Meeting and Asynchronous Learning.

II. For asynchronous learning inquiries, you may reach me through email (darwinbonifacio.smmc@gmail.com) or
group messenger every Saturday from 7:00am to 7:00pm.

LEARNING OBJECTIVES

After completing this module, you are expected to:

I. Discuss the nature, scope, classifications, and essential characteristics of taxation;
II. explain the limitations of power of taxation;
III. differentiate taxation from police power and eminent domain; and
IV. discuss the powers of the Bureau of Internal Revenue and its Commissioner.

LEARNING ACTIVITIES

1. Group discussion during a synchronous meeting.

2. Asynchronous Learning.

Individual activity #1:

OL & NOL Students:

1. In your own opinion, give at least five (5) benefits of taxation in the Philippines.
2. Differentiate taxation from police power and eminent domain.
3. Discuss the powers and duties of the Bureau of Internal Revenue.

Deadline:
OL & NOL February 19, 2022

ASSESSMENT/EVALUATION

I.Synchronous Test with a time limit.

A long test link will be provided through our group chat. This is a synchronous test with a time limit.

ASSIGNMENT

Module 2 covers the detailed discussion of Tax-accounting Concepts. A pretest link will be sent through
Messenger Group Chat. In addition answer the following questions…..

1. Differentiate cash basis principal method from accrual basis and hybrid method.
2. Differentiate taxable year from calendar year and fiscal year.

Deadline:
OL & NOL February 19, 2022

San Mateo Municipal College Module 1/AETAX1/Page 2

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

LEARNING RESOURCES

 Income and Business Taxation – 4th edition by Ballada, Win & Ballada, Susan 2017
 The New Tax Code of The Philippines Second Edition by Josephra;;y L. Chavez, Jr. 2021
 R.A. No. 10963 TRAIN Law
 R.A. No. 8424 National Internal Revenue Code
 Revenue Issuances of the Bureau of Internal Revenue

San Mateo Municipal College Module 1/AETAX1/Page 3

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

 FUNDAMENTAL CONCEPTS OF TAXATION
MODULE 1

INTRODUCTION

The greater part of the necessary expense of any great or civilized state must be defrayed
by taxes; the people contributing part of their own private revenue in order to make up
a public revenue to the sovereign.

-Adam Smith

Consistent with their mandate to collect taxes for and at the least cost to the government, tax authorities all over the
world continuously explore various approaches to enhance the effectiveness of their tax collection systems, The Bureau
of Internal Revenue (BIR), the premier tax agency of the Philippines, is one with them.

Since its establishment in 1904, the BIR has assumed the task of computing the tax liabilities of the taxpayers. Despite
its meager resources, the BIR was able to service them effectively because the taxpayer population then was relatively
few. But by 1959, the BIR started adopting the self-assessment system in order
to cope with the tremendous growth in taxpayer base after World War 2.

The Bureau faced another challenge in the 1990's with the advent of
information technology and electronic communication. This posed an urgent
need for a more efficient and effective tax collection system in a computerized
environment.

Available statistics show that voluntary compliance through the self-

assessment system contributes over 95% to BIR total collections, while
enforcement efforts* yield minimal results. Enforcement examiners counter
that their efforts must be measured not by collection turnout but by the impact
of their enforcement activities on the taxpayers'
voluntary compliance. Although difficult to prove, this claim has semblance of
truth.

Definitely, any tax collection system is bound to experience problems in the implementation of tax laws considering that
it is dealing with millions of taxpayers. As it is, the Philippine tax collection system is still far from perfect. Continuous
improvements are being made towards the attainment of the country's ever increasing revenue goals

TAXATION
Definition, Nature and Basis of Taxation

Taxation is the process or means by which the sovereign, through its lawmaking body raises income to defray the
necessary expenses of the government. Taxation, as a power of the State, is inherent in sovereignty.

Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need
(Commissioner vs. Pineda, 21 SCRA 105). A government cannot continue to exist and operate without financial means.
This inherent power gives the government the right to tax citizens and properties within its jurisdiction.

Taxation is indispensable and inevitable price for civilized society; without taxes, the government would be paralyzed
(Commissioner vs. Algue, Inc., L-28896, Feb. 17, 1988, 158 SCRA 9). Indeed, the collection of taxes remains one of the
primary undertakings of any government in order to provide sufficient funds with which a nation's economy may be
sustained and developed. In this light, it has become the enduring goal of every tax authority, be it one that serves a
developed or a developing nation, to seek and implement strategies and technologies that shall support the continuing
improvement of their collection systems.

San Mateo Municipal College Module 1/AETAX1/Page 4

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Upon taxation depends the Government's ability to serve the people for whose benefit taxes are collected (Vera vs.
Fernandez, 89 SCRA 199). The ultimate beneficiaries in the process are both the government and the citizens. The state
collects taxes in the exercise of its sovereign rights for the support of the government, for the administration of the laws,
and as a means for the continued operation of the various legitimate functions of the state.

Objectives of Taxation

Taxation is much more than just a means of raising revenue for the government. It is also one of the major means by
which the national government attempts to achieve various economic and social objectives. These objectives include
shifting wealth from the rich to the poor, maintaining price stability, stimulating economic growth, and encouraging full
employment.

In its efforts to achieve these objectives, Congress tends to use tax provisions in two different ways. First, some tax rules
are enacted for the purpose of mitigating certain undesirable economic and social conditions already existing. For
instance, low-income individuals often pay little or no national income taxes because of
the elaborate system of exclusions, deductions, and credits of current law. Second, other
tax rules provide incentives for certain desirable activities. For instance, business can
claim deductions for depreciation of productive assets much faster than the assets
actually wear out. This provides incentive for businesses to invest in these assets,
leading to increased employment of low- and middle-income workers.

All too often, the incentive and mitigating aspects of various tax provisions work at
cross-purposes. Consider the two examples just mentioned. While the purpose of the
rapid depreciation rules may be to increase investments in productive facilities that will
lead to increased employment of low- and middle-income workers, rapid depreciation
rates may also greatly reduce the tax liabilities of extremely wealthy individuals and
thus actually increase, rather than reduce, the concentration of wealth in society.

Perhaps it is because of these conflicting objectives that Congress so often seems to exhibit 'confused' behavior when
writing tax rules. When an incentive provision is enacted, numerous limitations and restrictions will usually prevent its
application in many circumstances. There may also be exceptions to the exceptions. Often the congressional process of
fine-tuning incentive tax provisions will create a maze of statutory law under which significant tax savings are possible,
but only if transactions are carefully planned to fit within' statutory requirements.

State Powers

1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary expenses of the
government.
2. Eminent Domain. The power of the state to take private property for public use upon payment of just
compensation.
3. Police Power. The power of the state to enact laws to promote public health, public morals, public safety and the
general welfare of the people.

Aspects of Taxation

1. Levying of the tax. The imposition of tax requires legislative intervention. In the Philippines, it is Congress that
levies taxes; and
2. Collection of the tax levied. This is essentially an administrative function.

Basic Principles of a Sound Tax System

1. Fiscal adequacy. Sources of revenue are sufficient to meet government expenditures;

2. Equality or theoretical justice. The tax imposed must be proportionate to taxpayer's ability to pay; and
3. Administrative feasibility. The law must be capable of convenient, just and effective administration.

San Mateo Municipal College Module 1/AETAX1/Page 5

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Limitations on the Power of Taxation

The power of taxation is, however, subject to constitutional and inherent limitations.
Constitutional limitations are those provided for in the constitution or implied from its provisions while inherent
limitations are restrictions to the power to tax attached to its nature. The following are the inherent limitations:

1. Purpose. Taxes may be levied only for public purpose;

2. Territoriality. The State may tax persons and properties under its jurisdiction;
3. International comity. The property of a foreign State may not be taxed by another;
4. Exemption. Governmental agencies performing governmental functions are exempt from taxation;
5. Non-delegation. The power to tax being legislative in nature may not be delegated.

Some Doctrines in Taxation

Prospectivity of Tax Laws

Taxes must be imposed prospectively. But if the legislative intent is for a tax statute to operate retroactively, then such
statute must state so explicitly and clearly. In the words of the Supreme Court: "Taxes may be imposed retroactively by
law but, unless so expressed by such law, these taxes must only be imposed prospectively." (Hydro Resources vs. Court
of Appeals, G.R. 80276, Dec. 21, 1990, 192 SCRA 604).

Double Taxation

Double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality
of a tax measure. However, if double taxation amounts to a direct duplicate taxation, in that the same subject is taxed
twice when it should be taxed but once, in a fashion that both taxes are imposed for the same purpose by the same taxing
authority, within the same jurisdiction or taxing district, for the same taxable
period and for the same kind or character of a tax, then it becomes legally
objectionable for being oppressive and inequitable.

Indirect double taxation is one other than the direct double taxation.
Though this type may not prove unconstitutional, it is being avoided so as
not to bring injustice to the taxpayer. An example of this occurs when
business tax is imposed by the municipal government prior to the issuance
of a business license to a taxpayer for engaging in an advertising business.
His income from his advertising business shall later be imposed income tax
by the national government.

When an item of income is taxed in the Philippines and the same income is
taxed in another country, there is only a case of indirect duplicate taxation which is not legally prohibited because the
taxes are imposed by different taxing authorities.

The usual methods of avoiding the occurrence of double taxation are:

a. allowing reciprocal exemptions either by law or by treaty;
b. allowance of tax credit for foreign taxes paid;
c. allowance of deduction for foreign taxes paid; and
d. reduction of the Philippine tax rate.

Set-off of Taxes
Taxes are not subject to set-off or legal compensation under Article 1279 of the Civil Code. This has been the Supreme
Court ruling in Republic vs. Mambulao Lumber Co. (6 SCRA 622). However, the high court reversed itself in the
subsequent case of Domingo vs. Garlitos (8 SCRA 443), when it decided that legal compensation can take place when the
taxes and the taxpayer's claim are fully liquidated, due, and demandable.
In a more recent case the Supreme Court echoed the Mambulao Lumber doctrine: "We have consistently ruled that there
can be no offsetting of taxes against the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being

San Mateo Municipal College Module 1/AETAX1/Page 6

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

collected. The collection of a tax cannot await the results of a lawsuit against the government" (Philex Mining Corporation
vs. Commissioner of Internal Revenue, Court of Appeals and The Court of Tax Appeals, G.R. 125704, Aug. 28, 1998).

Escape from Taxation

It is common for taxpayers to resort to tax avoidance and tax evasion in order to escape from taxation. Tax avoidance
happens when the taxpayer minimizes his tax liability by taking advantage of legally available tax planning opportunities.
This is otherwise known as tax minimization; others call it tax planning. It is the process of controlling one's actions so
as to avoid undesirable tax consequences. Tax avoidance is a completely legal activity. Just as the penalties of criminal
law can be avoided by not committing a crime, taxes can be avoided by not engaging in those activities that are taxed.
The law is not violated in any way. Rather, tax savings are achieved by arranging one's affairs, and thereby controlling
the facts, so as to avoid the application of those rules of law that would otherwise trigger a larger tax liability.
Tax evasion occurs when the taxpayer resorts to unlawful means to lessen or to get away with his tax liability. This is
also known as tax dodging. Examples of tax evasion are under-declaration of sales, overstatement of expenses and
backdating an important document.

While the dividing line may sometimes become hazy in practice, the basic notions of tax avoidance and tax evasion are
conceptually distinct. Both avoidance and evasion seek the same objective, namely saving taxes. But the means by which
that goal is sought are different. Avoidance is the legal process of not
conducting taxable transactions, On the other hand, tax evasion is the illegal
process of not complying with applicable provisions of the law once the
transactions already exist.

Tax evasion connotes the integration of three factors:

1. The end to be achieved (i.e., payment of less than the amount known
by the taxpayer to be legally due, or nonpayment of the tax when it
is shown that a tax is due);
2. An accompanying state of mind that is described as being in bad
faith, willful, or deliberate and not accidental; and
3. A course of action or failure of action that is unlawful (Commissioner of Internal Revenue v. The Estate of Benigno
P. Toda, Jr., G.R. 147188, Sept. 14, 2004).

Situs of Taxation

The situs of taxation is the place of taxation. The rule is that the State may rightfully levy and collect the tax where the
subject being taxed has a situs under its jurisdiction. The situs of taxation is determined by a number of factors:

1. Subject matter - or what is being taxed. He may be a person or it may be a property, an act or activity;
2. Nature of tax - or which tax to impose. It may be an income tax, an import duty or a real property tax;
3. Citizenship of the taxpayer; and
4. Residence of the taxpayer.

The following situs of taxation apply:

1. Persons - Residence of the taxpayer.

2. Real property or tangible personal property - Location of the property.
3. Intangible personal property - As a rule, situs is the domicile of the owner unless he has acquired a situs
elsewhere.
4. Income Taxpayer's residence or citizenship, or place where the income was earned.
5. Business, occupation and transaction - Place where business is being operated, occupation being practiced and
transaction completed.
6. Gratuitous transfer of property - Taxpayer's residence or citizenship, or location of the property.

San Mateo Municipal College Module 1/AETAX1/Page 7

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

TAXES
Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the State by
virtue of its sovereignty for the support of the government and all public needs.

Tax, in a general sense, is any contribution imposed by the government upon individuals, for the use and service of the
state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other
name. Tax, in its essential characteristics, is not a debt (Blacks' Law Dictionary).

Essential Characteristics of a Tax

1. It is an enforced contribution;
2. It is levied by the lawmaking body;
3. It is proportionate in character:
4. It is generally payable. in money;
5. It is imposed for the purpose of raising revenues; and
6. It is to be used for public purpose.

Types of Tax Rate Structures

Tax systems are often described as either regressive, proportional, or progressive. A tax is said to be regressive if the
average rate decreases as the tax base increases. For proportional taxes (also called flat or uniform taxes), the average
rate of tax remains constant for all levels of the tax base, whereas a progressive tax is one for which the average rate
increases as the amount of the tax bases increases.

Notice that the definitions of regressive, proportional, and progressive are based on the direction of change in tax rates
with respect to an increase in the tax base. The widely held political view that the rich should pay a larger amount of tax
than the poor could be upheld under any of the three rate structures- even a regressive one.
Before a tax system can be classified as either regressive or progressive, taxes must be expressed as a percentage of some
base amount. In the previous technical definitions, the base used for this purpose is the base on which the tax is
computed.

Constitutional Provision on Progressive System of Taxation

The Supreme Court declared R.A. 9337 or the VAT Reform Act constitutional. In the same decision, it clarified the
constitutional provision on progressive system of taxation The increase in corporate income tax rate and the removal of
certain exemptions are meant to distribute the burden of taxation. Although indirect taxes, e.g. VAT, are regressive by
nature, the constitution does not prohibit the imposition of indirect taxes.

When the Constitution mandated Congress to evolve a progressive system of taxation, it simply meant that direct taxes
should be preferred and that the regressive indirect taxes can be minimized with exemptions and differentiated rates
(G.R. 168056, G.. 168207, G.R. 168461, G.R. 168463, and G.R. 168730, Sept. 1, 2005).

Classification of Taxes

1. As to subject matter or object

a. Personal, poll or capitation - Tax of a fixed amount imposed on individuals, whether citizens or not, residing
within a specified territory without regard to their property or the occupation in which they may be engaged.
Example: community tax.

b. Property - Tax imposed on property, whether real or personal, in proportion either to its value or in
accordance with some other reasonable method of apportionment.
Example: real estate tax.

San Mateo Municipal College Module 1/AETAX1/Page 8

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

 c. Excise - Tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an
occupation.
Examples: estate tax, donor's tax, income tax, value-added tax.

2. As to who bears the burden

a. Direct - Tax demanded from persons who are intended or bound by law to pay the tax.
Examples; community tax, income tax, estate tax, donor's tax.

b. Indirect - Tax which the taxpayer can shift to another.

Examples: customs duties, value-added tax, some percentage taxes.

3. As to determination of amount

a. Specific - Tax imposed based on a physical unit of measurement, as by head or number, weight, or length or
volume.
b. Examples: tax on distilled spirits, fermented liquors, cigars, wines, fireworks, etc.

c. Ad valorem - Tax of a fixed proportion of the value of property; needs an independent appraiser to determine
its value.
Examples: real estate tax, certain customs duties, excise taxes on cigarettes, gasoline and others.

Excise taxes on certain specific goods imposed under the National Internal Revenue Code are either specific
or ad valorem taxes.

4. As to purpose

a. General, fiscal or revenue - Tax with no particular purpose or object for which the revenue is raised, but is
simply raised for whatever need may arise.
Examples: income tax, value-added tax.

b. Special or regulatory - Tax imposed for a special purpose regardless of whether revenue is raised or not,
and is intended to achieve some social or economic end.
Example: protective tariffs or customs duties on certain imported goods to protect local industries against
foreign competition.

5. As to authority imposing the tax or scope

a. National - Tax imposed by the national government.

Examples: internal revenue taxes, tariff and customs duties.

b. Municipal or local - Tax imposed by municipal governments for specific needs.

Examples: real estate taxes, municipal licenses.

6. As to graduation or rate

a. Proportional - Tax based on a fixed percentage of the amount of property income or other basis to be taxed.
Examples: percentage taxes, real estate taxes.

b. Progressive or graduated - Tax rate increases as the tax base increases.

Examples: income tax, estate tax, donor's tax.

c. Regressive - Tax rate decreases as the tax base increases.

Example: value-added tax.

San Mateo Municipal College Module 1/AETAX1/Page 9

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Tax Distinguished from Other Fees

1. From toll. Toll is a sum of money for the use of something, generally applied to the consideration which is paid
for the use of a road, bridge or the like, of a public nature.

A toll is a demand of proprietorship, is paid for the use of another's property and may be imposed by the
government or private individuals or entities; while tax is a demand of sovereignty, is paid for the support of the
government and may be imposed only by the State.

2. From penalty. Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious.
Violation of tax laws may give rise to imposition of penalty.
A penalty is designed to regulate conduct and may be imposed by the government or private individuals or
entities. Tax, on the other hand, is primarily aimed at raising revenue and may be imposed only by the
government.

3. From special assessment. Special assessment is an enforced proportional contribution from owners of lands for
special benefits resulting from public improvements.

Special assessment is levied only on land, is not a personal liability of the person assessed, is based wholly on
benefits and is exceptional both as to time and place. Tax is levied on persons, property, or exercise of privilege,
which may be made a personal liability of the person assessed, is based on necessity and is of general application.

4. From permit or license fee. Permit or license fee is a charge imposed under the police power for purposes of
regulation.

License fee is imposed for regulation and involves the exercise of police power while tax is levied for revenue
and involves the exercise of the taxing power. Failure to pay a license fee makes an act or a business illegal while
failure to pay a tax does not necessarily make an act or a business illegal.

5. From debt. A debt is generally based on contract, is assignable and may be paid in kind while a tax is based on
law, cannot generally be assigned and is generally payable in money. A person cannot be imprisoned for non-
payment of debt while he can be for non-payment of tax (except poll tax).

6. From revenue. Revenue is broader than tax since it refers to all funds or income derived by the government
taxes included. Other sources of revenues are government services, income from public enterprises and foreign
loans.

7. From customs duties. Customs duties are taxes imposed on goods exported from or imported to a country.
Customs duties are actually taxes but the latter is broader in scope.

TAX LAWS
Sources of Tax Authority

The three branches of the national government are the President and his
administration (executive), the Congress (legislative), and the Courts
(judicial). Congress creates statutory law, The National Internal Revenue Code
(NIRC) of 1997 is a statutory law.

The administrative branch of the national government includes the

Department of Finance (DOF), of which the Bureau of Internal Revenue (BIR)
is a bureau. Two commonly encountered types of administrative tax
authorities are Revenue Regulations and Revenue Rulings. Most, Revenue

San Mateo Municipal College Module 1/AETAX1/Page 10

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Regulations are administrative interpretations of the statutes enacted by Congress and tend to be somewhat more
detailed than the Code itself. Revenue Rulings are much more detailed, as they are issued in order to explain the tax
results of very specific transactions.

Court decisions occur when the BIR and taxpayers are unable to agree on what constitutes the correct application of the
tax statutes to specific situations. While Congress writes the statutes an administrative branch implements them, the
judiciary branch has the final say on what the words of the statutes really mean in actual application. In summary, tax
'law,' in general, is composed of all three elements: (1) the Code, (2) Regulations and Rulings, and (3) decisions of various
courts that hear tax cases.

Sources of Tax Laws

1. Constitution;
2. Statutes and Presidential Decrees;
3. Revenue Regulations by the Department of Finance;
4. Rulings issued by the Commissioner of Internal Revenue and Opinions by the Secretary of Justice;
5. Decisions of the Supreme Court and the Court of Tax Appeals;

The "rational basis test" is applied to gauge the constitutionality of an assailed law in the face of an equal
protection challenge. It has been held that "in areas of social and economic policy, a statutory classification that
neither proceeds along suspect lines nor infringes constitutional rights must be upheld again equal protection
challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the
classification." Under this test, it is sufficient that the legislative classification is rationally related to achieving
some legitimate State interest (British American Tobacco vs. Jose Isidro Camacho, et al, G.R. 163583, Apr. 15,
2009).

6. Provincial, city, municipal, and barangay ordinances subject to limitations set forth in the Local Government
Code; and
7. Treaties or international agreements the purpose of which is to avoid or minimize double taxation.

Republic Act 9282

R.A. 9282 expanded the jurisdiction of the Court of Tax Appeals (CTA). This law took effect on Apr. 22, 2004. It amended
R.A. 1125-the law creating the CTA. Some salient features of R.A. 9282 follow:

 The CTA shall be of the same level as the Court of Appeals (CA).
 It shall be composed of a presiding justice and five associate justices. For en banc sessions, four justices shall
constitute a quorum. The affirmative vote of four members shall be necessary to render a decision or resolution.
 There shall be two divisions (with three members each); the chairmen shall be the presiding justice and the most
senior associate. Two justices constitute a quorum for sessions of a division. In order to render a
decision/resolution, the affirmative vote of two members of a division is necessary.

The CTA has exclusive original jurisdiction over all criminal offenses arising from violations of the NIRC and other laws
administered by the BI where the principal amount of taxes and fees (exclusive of charges and penalties) claimed is P1
million and above. For the same amount of claim, the CTA has exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees, charges and penalties.

The CA has the exclusive jurisdiction to review on appeal decisions of the Commissioner of Internal Revenue (CIR) in
cases involving disputed assessments, refunds of internal revenue taxes, tees or other charges, penalties, or other
matters. In case of inaction by the BIR where the NIRC provides a specific period of action, the inaction shall be deemed
a denial and the CTA has the jurisdiction to review the same.

The Supreme Court has ruled that while the Revised Rules of the CTA confers on the CTA jurisdiction to resolve tax
disputes in general, this does not include cases where the constitutionality of a law or rule is challenged (British
American Tobacco vs. Jose Isidro Camacho, et, al., G.R. 163583). The regular courts have jurisdiction to pass upon the
validity of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi legislative
function.

San Mateo Municipal College Module 1/AETAX1/Page 11

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Interpretation and Construction of Tax Statutes

The recognized rules in statutory construction also apply to tax statutes. As in other statutes, the legislative intent is the
primary concern. However, where there is doubt in determining the legislative intent, the doubt must be resolved
liberally in favor of taxpayers and strictly against the taxing authority.

Exemptions in taxation are highly disfavored in law; they are not to be presumed nor implied but must be clearly
expressed. A tax exemption, when granted, shall be strictly construed against the grantee. Thus, he who claims the tax
exemption must be able to justify his claim or right. As decided by the Supreme Court: "The exception contained in the
tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor
on tax exemptions and that he who would seek to be, thus, privileged must justify it by words too plain to be mistaken
and too categorical to be misinterpreted." (Commissioner of Internal Revenue vs. J. Kiener Company, Ltd., 65 SCRA 143).

Philippine Tax Laws and Taxes

1. National Internal Revenue Code of 1997 (P.D. 1158, as amended);

 Income tax (individual and corporate);

 Estate tax;
 Donor's tax;
 Value-added tax;
 Percentage tax;
 Capital Gains tax.
 Withholding taxes.
 Excise tax;
 Documentary stamp tax.

2. Tariff and Customs Code of 1978 (P.D. 1464, as amended);

a. import duties; and
b. export duties.

 Local Government Code of 1991 (R.A.7160);

a. real property tax;
b. business taxes, fees and charges;
c. professional tax;
d. community tax; and
e. tax on banks and other financial institutions.

 Special Laws
a. Motor Vehicle Law (R.A. 4136) - motor vehicle fees;
b. Private Motor Vehicle Tax Law (P.D. 1958) - private motor vehicle tax;
c. Philippine Immigration Act of 1940 (C.A 613, as amended) - immigration tax; and
d. Travel Tax Law (P.D. 1183, as amended) - travel tax.

San Mateo Municipal College Module 1/AETAX1/Page 12

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

TYPES OF TAXES IN THE PHILIPPINES

1. Income Tax

Income Tax is a tax on a person's income, emoluments, profits

arising from property, practice of profession, conduct of trade or
business or on the pertinent items of gross income specified in the
Tax Code of 1997 (Tax Code), as amended, less the deductions if any,
authorized for such types of income, by the Tax Code, as amended,
or other special laws.

Who are Required to File Income Tax Returns?

Individuals

 Resident citizens receiving income from sources within or outside the Philippines
 Employees deriving purely compensation income from two or more employers, concurrently or successively at
any time during the taxable year
 Employees deriving purely compensation income regardless of the amount, whether from a single or several
employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not
equal to the tax withheld) resulting to collectible or refundable return
 Self-employed individuals receiving income from the conduct of trade or business and/or practice of profession
 Individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business
and/or practice of profession
 Individuals deriving other non-business, non-professional related income in addition to compensation income
not otherwise subject to a final tax
 Individuals receiving purely compensation income from a single employer, although the income of which has
been correctly withheld, but whose spouse is not entitled to substituted filing
 Non-resident citizens receiving income from sources within the Philippines
 Aliens, whether resident or not, receiving income from sources within the Philippines

Non-Individuals

 Corporations including partnerships, no matter how created or organized.

 Domestic corporations receiving income from sources within and outside the Philippines
 Foreign corporations receiving income from sources within the Philippines
 Estates and trusts engaged in trade or business

2. Value-added Tax

Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax,
which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.

Who are Required to File VAT Returns?

 Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or
properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed
Three Million Pesos (Php3,000,000.00)
 A person required to register as VAT taxpayer but failed to register
 Any person, whether or not made in the course of his trade or business, who imports goods

San Mateo Municipal College Module 1/AETAX1/Page 13

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

3. Withholding Taxes

The amount of an employee's pay withheld by the employer and sent directly to the government as partial payment of
income tax.

Importance of Withholding Tax System

 It is considered as an effective tool in the collection of taxes for the following reasons:
 It encourages voluntary compliance;
 It reduces cost of collection effort;
 It prevents delinquencies and revenue loss; and
 It prevents dry spell in the fiscal conditions of the government by providing revenues throughout the taxable
year.

Persons Required To Withhold Withholding Taxes

 Individuals engaged in business or practiced of profession

 Non-individuals (corporations, associations, partnertship, cooperatives) whether engaged in business or not
 Government agencies and its instrumentalities (National Government Agentcies (NGAs), Government-owned or
Controlled Corporations (GOCCs), Local Government Units including Baranggays (LGUs)

A WITHHOLDING AGENT is any person or entity who is in control of the payment subject to withholding tax and
therefore is required to deduct and remit taxes withheld to the government.

Classification of Withholding Taxes

1. Creditable withholding tax – is an advance income tax of the payee. This would mean that even before filing
the income tax return in the Philippines, the taxpayer had already remitted portion of its income tax liability
through the payor who withheld and remitted the same to the BIR.

a) Compensation - refers to all remuneration for services performed by an employee for his employer under
an employee-employer relationships unless exempted by the NIRC and pertinent laws.

Kinds of Compensation

Regular Supplementary
 Basic Salary  Commission
 Fixed allowances  Overtime pay
 Fees, including directors fees
 Profit sharing
 Monetized vacation leave in excess of ten (10) days
 Sick leave
 Fringe benefits received by rank and file employees
 Hazard pay
 Taxable 13th month pay and other benefits
 Other remuneration received from an employee-employer
relationships

Minimum Wage Earners - No withholding tax shall be required on the Statutory Minimum Wage (SMW) of the
Minimum Wage earner in the private/public sectors as defined in RR 2-98, as amended by RR 11-2018, including:

 Holiday pay
 Overtime pay
 Night shift differential
 Hazard pay

San Mateo Municipal College Module 1/AETAX1/Page 14

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

 Table 1. Revised Withholding Tax Table effective January 1, 2018 to December 31, 2022

Table 2. Revised Withholding Tax Table effective January 1, 2023 and onwards

San Mateo Municipal College Module 1/AETAX1/Page 15

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

 Table 3. Annual Tax Table

b) Expanded - The Withholding of Creditable Tax at Source or simply called Expanded Withholding Tax is a tax
imposed and prescribed on the items of income payable to natural or juridical persons, residing in the
Philippines, by a payor-corporation/person which shall be credited against the income tax liability of the
taxpayer for the taxable year.
c) Withholding Tax on GMP - Value Added Taxes (GVAT) - is the tax withheld by National Government
Agencies (NGAs) and instrumentalities, including government-owned and controlled corporations (GOCCs)
and local government units (LGUs), before making any payments to VAT registered
taxpayers/suppliers/payees on account of their purchases of goods and services.
d) Withholding Tax on Government Money Payments (GMP) - Percentage Taxes - is the tax withheld by
National Government Agencies (NGAs) and instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before making any payments to non-VAT
registered taxpayers/suppliers/payees.

2. Final Withholding Tax is a kind of withholding tax which is prescribed on certain income payments and is not
creditable against the income tax due of the payee on other income subject to regular rates of tax for the taxable
year. Income Tax withheld constitutes the full and final payment of the Income Tax due from the payee on the
particular income subjected to final withholding tax.

Tax Laws Versus GAP and GAAS

All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax
Code, and the rules and regulations issued implementing said Tax Code. Taxability of income and deductibility of
expenses shall be determined strictly in accordance with the provisions of the Tax Code and the rules and regulations
issued implementing the said Tax Code. In case of difference between the provisions of the Tax Code and the rules and
regulations implementing the Tax Code, on one hand, and the generally accepted accounting principles (GAP) and the
generally accepted auditing standards (GAS) on the other hand, the provisions of the Tax Code and the rules and
regulations issued implementing the said Tax Code shall prevail (Revenue Memorandum Circular 22-04, Apr. 12, 2004).

San Mateo Municipal College Module 1/AETAX1/Page 16

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Internal Revenue Laws

Revenue law is a law passed for the purpose of authorizing the levy and collection of taxes in some form to raise revenue.
A revenue law is said to be a national revenue law when it is applicable all over the country.

Internal revenue laws are neither political nor penal in nature although there are penalties in case of violations. Tax laws
are civil in nature.

History of the Philippine Internal Revenue Law

The first Philippine Internal Revenue Law, patterned after that existing in the United States, was approved by the
Philippine Commission on July 2, 1904 as Act 1189 effective Aug. 4, 1904. Subsequent internal revenue laws were
approved in 1913, 1916 and 1917. On June 15, 1939, the National Assembly approved the National Internal Revenue
Code (NIRC) as Commonwealth Act 466, which took effect on July 1, 1939. The Code was amended by Republic Act 6110
otherwise known as The Omnibus Tax Law in 1969, Presidential Decree 69 in 1972, NIRCs of 1977 and 1986, and various
presidential decrees and executive orders.

Enacted on July 28, 1997 by the Philippine Congress was Republic Act 8424, An Act Amending the National Internal
Revenue Code, As Amended, and for Other Purposes, otherwise known as the "Tax Reform Act of 1997." The Act declares
the policy of the State to promote sustainable economic growth through the rationalization of the Philippine internal
revenue tax system, including tax administration; to provide, as much as possible, an equitable relief to a greater number
of taxpayers in order to improve levels of disposable income and increase economic activity; and to create a robust
environment for business to enable firms to compete better in the regional as well as the global market, at the same time
that the State ensures that Government is able to provide for the needs of those under its jurisdiction and care.

The Code imposes progressive rates of income taxes on citizens and resident aliens. The progressive scheme of income
taxation was introduced in our tax system as a measure of raising more revenues to meet adequately the increasing
needs of the government and at the same time to correct inequalities in taxation by equitably distributing the tax burden
based upon the principle of ability to pay.

The Bureau of Internal Revenue

The Bureau of Internal Revenue (BIR) functions under the supervision and control of the Department of Finance (DOF).
The Bureau was created by Commonwealth Act 466, approved by the National Assembly on June 15, 1939, effective July
1, 1939, which revised and codified the then internal revenue laws of
the Philippines.

The mission of the BIR is "to collect taxes efficiently and effectively,
for and at the least cost to the government, through impartial and
consistent enforcement of internal revenue laws, and convenient and
honest service to taxpayers.

BIR collection accounts for more than 60% of the national

government's total revenues. The BIR carries the bulk of the burden of solving the country's budget deficit problem.

Tax Collection System

With a growing taxpayer population and limited resources, the BIR adopted the "self- assessment system" when Republic
Act 2343 was enacted in 1959. R.A. 8424 otherwise known as the Tax Reform Act of 1997 retained this principle.

Under the self-assessment system, the taxpayer calculates the tax by himself or through an accountant, fills up his tax
return, files it with the proper tax office, and pays the tax due thereon upon filing. The process by which the tax is
computed and determined is what is called the "self-assessment" method, and the resulting tax a "self-assessed" tax.

San Mateo Municipal College Module 1/AETAX1/Page 17

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Over the years, the BIR has employed various collection methods, amending processes or introducing innovations as the
need arises. On the whole, however, the methods of collection utilized by the BIR may be classified into two (2) major
categories: collection through voluntary compliance and collection by enforcement.

The act of tendering the payment of the self-assessed tax is referred to as "voluntary compliance" or "voluntary
payment." Collection by enforcement, on the other hand, is conducted through the identification of sectors of business
or industries, and/or segments of economic activities where the degree of compliance is low, and the subsequent audit
or investigation of enterprises and companies that are part of these selected industries.

BIR Issuances and Rulings Defined

 Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective
enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.

 Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well
as amplifications, of laws, rules, regulations and precedents issued by the BI and other agencies/offices.

 Revenue Memorandum Orders (RMOs) are 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 Bureau in all areas of operations,
except auditing.

 Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of
Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of
facts, with or without established precedents, and which the Commissioner may issue from time to time for the
purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore,
cannot contravene duly issued RMs; otherwise, the Rulings are null and void ab initio.

 BIR Rulings are official positions of the BIR on inquiries of taxpayers, who request clarification on certain
provisions of the Tax Code, other tax laws, or their implementing regulations, usually for seeking tax exemptions.
Rulings are based on particular facts and circumstances presented and are interpretations of the law at a specific
point in time. Tax rulings cannot be cited as precedent, but can provide useful information on how the BIR may
treat a similar transaction. They are also issued to answer questions of individuals and juridical entities regarding
their status as taxpayers, and the effect of their transactions for taxation purposes.

The BIR does not give planning advice or "approve" tax planning arrangements or resolve an issue through a
ruling if the matter can be determined through another process (i.e., appeal). The Law and Legislative Division
will not issue a ruling in response to a request in the following instances:

a. The taxpayer has directed a similar inquiry to another office of the BIR;
b. The same issue involving the same taxpayer or a related taxpayer is pending in a case in litigation; and
c. The same issue involving the same taxpayer is the subject of a pending investigation, ongoing audit,
administrative protest, claim for refund or issuance of tax credit certificate, or collection proceeding
(Revenue Memorandum Order 9-2014, Feb. 6, 2014).

 Revenue Bulletins (RBs) 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 to tax laws and other issuances for the
guidance of the public. The BIR also issues Revenue Audit Memorandum Orders (RAMOs).

San Mateo Municipal College Module 1/AETAX1/Page 18

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Revenue Regulations 5-2012 was published on April 4, 2012. Then, the Commissioner, thru RMC 22-2012, clarified that:

1. All BIR rulings issued prior to Jan. 1, 1998 (the effectivity date of R.A. 8424) –

 Are not be used as precedent by any taxpayer as a basis to secure rulings for themselves for current business
transaction/s or in support of their position against any assessment;
 Are not to be used by any BIR action lawyer in issuing new rulings for request for rulings involving current
business transaction/s.

2. BIR rulings issued prior to Jan. 1, 1998 remain valid but only:
 To the taxpayer who was issued the ruling; and
 Covering the specific transactions which is the subject of the same ruling.

3. BIR rulings issued prior to Jan. 1, 1998 shall remain valid as mentioned above, unless expressly notified of its
revocation or unless the legal basis in law for such issuance has already been repealed/amended in the current
Tax Code.

A BIR issuance cannot be applied retroactively if it will prejudice the interest of taxpayers (COL Financial Group, Inc. vs.
Commissioner of Internal Revenue, CTA (3rd Division) Case 8454, Apr. 15, 2014).

Powers and Duties of the Bureau of Internal Revenue

The chief officials of the Bureau are the Commissioner and four (4) Deputy Commissioners. The Deputy Commissioners
are tasked to handle particular groups within the Bureau such as Information Systems Group, Operations Management,
Legal Group, Resource Management Group. Its powers and duties follow:

1. Assessment and collection of all national internal revenue taxes, fees and charges;
2. Enforcement of all forfeitures, penalties, and fines;
3. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and ordinary courts; and
4. Administration of supervisory and police powers conferred to it.

Powers of the Commissioner

1. Interpret tax laws and decide tax cases;

2. Obtain information, and to summon, examine, and take testimony of persons;
3. Make assessments and prescribe additional requirement for tax administration and enforcement.
4. Delegate powers vested in him by the Code to any subordinate officer with rank equivalent to a division chief or
higher.
5. Suspend business operations of a taxpayer.
6. Compromise, abate and refund or credit taxes.

Tax Incentives

An example of a law that grants tax incentives is the Adopt-a-School Act of 1998 (R.A. 8525). Revenue Regulations 10-
2003 implements the tax incentive provisions of said law. A pre-qualified adopting private entity which enters into an
agreement with a public school shall be entitled to the following tax incentives:

 Deduction from gross income of the amount of contribution/donation that were actually, directly and exclusively
incurred for the Program, subject to limitations, plus an additional amount equivalent to 50% of such
contribution/donation;

 Exemption of the Assistance made by the donor from payment of donor's tax. Donation and donor's tax are
covered in another text, Transfer and Business Taxation by the same book team.

San Mateo Municipal College Module 1/AETAX1/Page 19

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA

Section 19 of R.A. 10028, the Expanded Breastfeeding Promotion Act of 2009, states that "The expenses incurred by a
private health and non-health facility, establishment or institution, in complying with the provisions of this Act, shall be
deductible expenses for income tax purposes up to twice the actual amount incurred: Provided, That the deduction shall
apply for the taxable period when the expenses were incurred: Provided, further, That all health and non-health facilities,
establishments and institutions shall comply with the provisions of this Act within six (6) months after its approval:
Provided, finally, That such facilities, establishments or institutions shall secure a "Working Mother-Baby-Friendly
Certificate" from the Department of Health to be filed with the Bureau of Internal Revenue, before they can avail of the
incentive."

Per Republic Act 9999 or the Free Legal Assistance Act of 2010, a lawyer or professional partnerships rendering actual
free legal services, as defined by the Supreme Court, shall be entitled to an allowable deduction from the gross income,
the amount that could have been collected for the actual free legal services rendered or up to 10% of the gross income
derived from the actual performance of the legal profession, whichever is lower: Provided, That the actual free legal
services herein contemplated shall be exclusive of the minimum 60 hours mandatory legal aid services rendered to
indigent litigants as required under the Rule on Mandatory Legal Aid Services for Practicing Lawyers, under BAR Matter
2012, issued by the Supreme Court.

In this world, nothing

can be said to be
certain, except death
and taxes.

- Benjamin Franklin

San Mateo Municipal College Module 1/AETAX1/Page 20

College of Business and Accountancy Prepared by Darwin C. Bonifacio, MBA