Tax 1: Unit 1.

Chapter 2

Tax 1: Unit 1. Chapter 2 Taxes, Tax laws and Tax Administration

I. Sources of Tax Laws and Administrative Issuances
1. The Constitution - provides for limitations of the power to tax and not grants of power to
tax. Power to tax is inherent in sovereignty.
2. Statutory Enactments and Presidential Decrees- Laws passed by the legislative
department and the president respectively.
3. BIR Rulings and Revenue Regulations – issuances of the Department of Finance that
clarify certain provisions of the tax law.
4. Judicial Decisions- refers to decisions of the Court of Tax Appeals and Supreme Court
applying or interpreting tax laws.
Interpretation of Tax Laws
General Rule: Liberally in favor of the taxpayer and strictly against the government.
Exception: In cases of Tax exemption and deduction, it is against the taxpayer for it reduces
the revenue collection of the government.
II. Nature and Elements of Tax
Elements of Taxation (ESP)
1. It is enforced proportional contribution from persons and properties;
2. It is imposed by the State by virtue of its Sovereignty; and
3. It is levied for the support of the government and for all Public needs
Imprescriptibility of Taxes:
General Rule: The right to assess and to collect are imprescriptible
Exception: When the laws provide for statute of limitations.
III. Classification of Taxes
A. As to Subject matter
1. Personal, Poll or Capitation- imposed on persons residing within a specified
territory without regard to their property or occupation. (ex. Community tax)
2. Property- tax on property whether real or personal. (ex. Real property tax)
3. Excise (privilege) - imposed upon the performance of an act, enjoyment of
privilege, or engaging in an occupation. (ex. Income Tax, Estate Tax, Donor’s Tax)
B. As to who bears the burden
1. Direct- demanded from persons who shoulder also the burden of taxation of the
tax. (ex. Income Tax, Community Tax)
2. Indirect- demanded from person who shall indemnify himself at the expense of
another. (ex. VAT and other percentage taxes)
C. As to determination of Amount
1. Specific- fixed amount by the head, number or some standard of weight or
measurement.
2. Ad Valorem- fixed proportion of the value of property with respect to which tax is
assessed.
D. As to purpose
1. Revenue- imposed to raise revenue for the general purposes of the government
2. Special or regulatory- imposed for special purpose (sin tax on cigarettes and
alcoholic beverages)
E. As to imposing authority
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1. National- imposed by the national government.

a. Income Tax- tax on annual income, gains or profits
b. Estate Tax- tax on gratuitous transfer of properties by a deceased 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.
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. Municipal or local- imposed by the local government units. (Real Property;
Professional Tax; Community Tax)
F. As to graduation of rate:
1. Proportional- based on a fixed percentage of property, receipts or other basis to
be taxed. (VAT, OPT, Estate, Donor’s, etc.)
2. Progressive- rate increases as the tax base increases. (Income Tax for individual
taxpayers)
3. Regressive- the tax rate decreases as the tax base increases (Not currently
adopted in the Philippines)
IV. Tax and Other Collections

TAX VS. LICENSE FEES

Tax License Fee

Basis Taxation power Police power

Purpose Revenue Regulation

Limitation on Amount Subject only to inherent and Limited to the cost of

constitutional limitations issuance of license and cost
of inspection and surveillance

When paid After the start of business Before the start of business

Surrender vis-a-vis Cannot be surrendered Lawful consideration is not

necessity of consideration except for lawful necessary
consideration

Effect of non-payment Will not render the business Will render the business
illegal BUT criminal illegal
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prosecution will result

IMPORTANCE OF DISTINCTION:
1. Government instrumentality concerned may not be authorized to exact taxes but IS
authorized to exact license fees
2. Person imposed upon may be exempt from taxes BUT NOT exempt from license fees
3. Tax, NOT fees, may be claimed as income tax deduction for income tax purpose. However,
fees may be considered as expenses ordinary and necessary for business.
4. In Local Government Taxation, Sec. 187 of the Local Government Code covers only “tax”
ordinance. Such that, if the ordinance is regulatory, it does not come within the purview of Sec.
187 and the CTA does not have jurisdiction over the legality of the same, jurisdiction thereof
being under the RTC.

TAX VS. TOLL

Tax Toll

Definition Demand of sovereignty for Amount charged for the cost

raising revenue and maintenance of property
used

Purpose For support of the As compensation for use of

government another's property

Determination of Amount Determined by the sovereign Determined by the cost of the

property or improvement

Who may impose Imposed by the State Imposed by the government

or private individual

TAX VS. PENALTY

Tax Penalty

Definition Demand of sovereignty for Sanction imposed for

raising revenue violation of laws

Purpose For revenue To regulate conduct

TAX VS. SPECIAL ASSESSMENT

Tax Special Assessment

Definition Demand of sovereignty for Amount charged for the cost

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raising revenue and maintenance of property

used

Subject Imposed on lands, persons, Imposed on land only

property, income, business,
etc.

Liability Personal Non-personal

Basis Based on necessity (and Based solely on benefits

partially on benefits)

Application General Special to a particular time

and place

TAX VS. CUSTOMS DUTIES

Tax Custom Duties

Purpose For revenue Controlling the flow of the

goods of the country

Broadness Broader term Tariff or tax on the

importation (usually) or
exportation (unusually) of
goods

TAX VS. DEBT

Tax Debt

Basis Law Contract/ judgment

Effect of failure to pay Civil and criminal liability Civil liability only (No
imprisonment)

Mode of payment Money Money, property or service

Assignability No Yes

Subjectivity to No Yes
Compensation/ Set-off

Interest Yes, if deficient or delinquent General Rule: no interest,

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unless expressly stipulated or

after demand is made

Authority Public authority Private individuals

Prescription Determined by the Tax Code Determined by the Civil Code

V. Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy- revenue must be sufficient to meet government spending (not to incur
deficit).
2. Equality or Theoretical Justice - progressive or based on taxpayer’s ability to pay
3. Administrative Feasibility - capable of convenient, just and effective administration.
Effect of violation of the Principles
- A tax law will retain its validity even if it is not in consonance with the principles of fiscal
adequacy and administrative feasibility because the Constitution does not expressly
require so. These principles are only designed to make our tax system sound. However,
if a tax law runs contrary to the principle of theoretical justice, such violation will render
the law unconstitutional considering that under the Constitution, the rule of taxation
should be uniform and equitable.

VI. Classifications of Tax System

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.
Types of Tax Systems According to Imposition
1. Progressive - employed in the taxation of income of individuals, and certain local
business taxes
2. Proportional - employed in taxation of corporate income and business
3. Regressive -

Types of Tax system According to Impact

1. Progressive system - 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 - one that emphasizes indirect taxes. Indirect taxes are shifted by
business to consumers; hence, the impact of taxes upon the bottom end of the society.
In effect, a regressive tax system is anti-poor.

VII. Tax collection Systems

1. Withholding system on income tax - 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.
a. Creditable Withholding tax
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Withholding tax on compensation - an estimated tax required by the government

to be withheld by employers against the compensation income to their
employees.
Expanded withholding tax - an estimated tax required by the government to be
deducted on certain income payments made by taxpayers engaged in business.
b. Final withholding tax- a system of tax collection where payors are required to
deduct the full tax on certain income payments.

Similarities of final tax and creditable withholding tax

a. In both cases, the income payor withholds a fraction of the income and remits the same
to the government.
b. By collecting at the moment cash is available, both serve to minimize cash flow
problems to the taxpayer and collection problems to the government.

Final Withholding Tax Creditable Withholding Tax

Income tax withheld Full Only a portion

Coverage of withholding Certain passive income Certain passive income and

active income

Who remits the actual tax Income Payor Income Payor for CWT and
the taxpayer for the balance

Necessity of income tax Not Required Required

return for taxpayer

2. Withholding system on business tax - when the national government agencies and
instrumentalities including GOCCs purchase goods or services from private suppliers, the law
requires the withholding of the relevant business tax.

3. Voluntary compliance system (Self-assessment method) - The taxpayer himself

determines his income, reports the same through income tax returns and pays the tax to the
government.

4. Assessment or enforcement system - the government identifies non-compliant taxpayers,

assess their taxes dues including penalties, demands for taxpayer’s voluntary compliance or
enforces collections by coercive means such as a summary proceeding or judicial proceedings
when necessary.

VIII. Powers of the Commissioner of Internal Revenue

1. The power to interpret the provisions of the NIRC and other tax laws, subject to review
by the Secretary of Finance.
2. The power to decide, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals
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a. disputed assessments
b. refunds of internal revenue taxes, fees or other charges
c. penalties imposed in relation thereto; or
d. other matters arising under the NIRC or other laws administered by the Bureau of
Internal Revenue
3. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons.
Purpose: For the CIR to ascertain:
a. the correctness of any return, or in making a return when none has been made;
b. the liability of any person for any internal revenue tax, or in correcting any such
liability; or
c. tax compliance of the taxpayer.
Authorized acts:
a. To examine any book, paper, record, or other data which may be relevant
or material to such inquiry;
b. To obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit
c. To summon the person liable for tax or required to file a return, or any
officer or his employee, or any person having possession, custody, or his
books of accounts and accounting records to produce such books,
papers, records, or other data, and to give testimony;
d. To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; and
e. To cause revenue officers and employees to make a canvass from time
to time of any revenue district.
4. Power to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement.
5. To examine tax returns and determine tax due thereon
6. To Conduct Inventory-taking, Surveillance
7. To Prescribe Presumptive Gross Sales and Receipts when:
a. The taxpayer failed to issue receipts; or
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 the Taxable 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. performing any act tending to obstruct the proceedings for the collection of the
tax for the past or current quarter or year or to render the same totally or partly
ineffective
9. To Prescribe Real Property Values
Commissioner is authorized to divide the Philippines into different zones or areas and
shall, upon mandatory consultation with competent appraisers both from the private and
public sectors, and with prior notice to affected taxpayers determine the fair market value
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of real properties located in each zone or area, subject to automatic adjustment once
every three (3) years through rules and regulations issued by the Secretary of Finance
based on the current Philippine valuation standards
For purposes of computing any internal revenue tax, the value of the property shall be,
whichever is the higher of:
a. The fair market value as determined by the Commissioner; or
b. The fair market value as shown in the schedule of values of the Provincial and
City Assessors.
10. To compromise tax liabilities of taxpayers
11. To Inquire into Bank Deposit Accounts and Other Related information held by Financial
Institutions. Under the following instances
a. A decedent to determine his gross estate; and
b. In case a taxpayer files an application to compromise the payment of his tax
liabilities on his claim that his financial position demonstrates a clear inability to
pay the tax assessed, his application shall not be considered unless and until he
waives in writing his privilege under Republic Act No. 1405, Republic Act No.
6426, otherwise known as the Foreign Currency Deposit Act of the Philippines, or
under other general or special laws, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.
c. A specific taxpayer subject of a request for the supply of tax information from a
foreign tax authority pursuant to a treaty obligation, upon order of the president of
the PH under rules and regulations as may be prescribed by the SOF, upon the
recommendation of the CIR.
12. To Accredit and Register Tax Agents
Individuals and general professional partnerships and their representatives who are
denied accreditation by the Commissioner and/or the national and regional accreditation
boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal
within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to
rule on the Appeal within the prescribed period shall be deemed as approval of the
application for accreditation of the appellant.
13. To Compromise, Abate and Refund or Credit Taxes
14. To Prescribe Additional Procedural or Documentary Requirements.
15. To Delegate Power to any or such subordinate officials with the rank equivalent to a
division chief or higher, subject to such limitations and restrictions as may be imposed
under rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner:
Non-delegated power of the CIR
a. The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;
c. The power to compromise or abate
Exception:
The Regional Evaluation Board may compromise tax liability under the following:
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1. assessments issued by the regional offices involving basic deficiency

taxes of 500,000 or less;and
2. minor criminal violations discovered by regional and district officials.
National Evaluation Board- the basic tax involved exceeds 1 million or the
settlement offered is less than the prescribed minimum rates.