MODULE 2: TAXES, TAX LAWS AND TAX ADMINISTRATION

TAXATION LAW – refers to any law that arises from the exercise of the taxation power of the State.

Types of taxation laws

1. Tax laws – these are laws that provide for the assessment and collection of taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local tax Code
d. The Real Property Tax Code

2. Tax exemption laws – these are laws that grant immunity from taxation
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O 226)
c. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act

NATURE OF PHILIPPINE TAX LAWS

✓ Civil and not political in nature
✓ Our internal revenue laws are not penal in nature because they do not define crime. Their
penalty provisions are merely intended to secure taxpayers’ compliance.

TAX – an enforced proportional contribution levied by the lawmaking body of the State to raise
revenue for public purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation.
2. Tax must not violate constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.

Classification of Taxes
A. As to purpose
1. Fiscal or revenue tax – a tax imposed for general purpose
2. Regulatory – a tax imposed to regulate business, conduct, acts or transactions
3. Sumptuary - a tax levied to achieve some social or economic objectives

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

C. As to who bears the burden

1. Direct tax – tax demanded from persons who are intended or bound by law to pay the
tax.
2. Indirect tax - which the taxpayer can shift to another.

D. As to determination of amount
 1. Specific – tax imposed on a physical unit of measurement as by head or number,
weight, or length or volume
2. Ad valorem – tax of a fixed proportion of the value of property; needs an independent
appraiser to determine its value.

E. As to rate

1. Proportional tax – tax based on fixed percentage of the amount of property, income or
other basis to be taxed
2. Progressive or graduated tax – this is a tax which imposes increasing rates as the tax
base increase. The use of progressive tax rates results in equitable taxation because it
gets more tax to those who are more capable. It aids in lessening the gap between the
rich the poor.
3. Regressive tax – tax rate decreases as the tax base increases. It is regarded as anti-
poor. It directly violates the Constitutional guarantee of progressive taxation.
4. Mixed tax – combination of the above mentioned types of tax.

F. As to imposing authority
1. National tax – tax imposed by the national government
Examples:
a. Income tax – tax in annual income, gains or profits
b. Estate tax – tax on gratuitous transfer of properties by a decedent upon death
c. Donor’s tax – tax on gratuitous transfer of properties by a living donor
d. Value added tax – consumption tax collected by VAT business taxpayers
e. Other percentage tax – consumption tax collected by non-VAT business taxpayers
f. Excise tax – tax on sin products and non-essential commodities such as alcohol,
cigarettes and metallic minerals. This should be differentiated with the privilege tax
which is called excise tax.
g. Documentary stamp tax – a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation,
right or property incident thereto.

2. Local tax – tax imposed by the municipal or local government

Examples:
a. Real property tax
b. Professional tax
c. Business taxes, fees and charges
d. Community tax
e. Tax on banks and other financial institution

DISTINCTION OF TAXES WITH SIMILAR ITEMS

TAX REVENUE
✓ Amount imposed by the government for ✓ All income collections of the government
public purposes. which includes taxes, tariff, licenses, toll,
✓ Amount imposed. penalties and others.
✓ Amount collected.

TAX LICENSE FEE

✓ Arises from taxation power and is imposed ✓ Arises from police power.
upon any object such as persons, ✓ Imposed to regulate the exercise of a
properties or privileges to raise revenue. privilege such as commencement of a
✓ Imposed after the commencement of a business or a profession.
business or profession (post-activity ✓ Imposed before the commencement of a
imposition). business or profession (pre-activity
imposition).

TAX TOLL
✓ Levy of a government, hence demand of ✓ A charge for the use of other’s property
sovereignty. hence a demand of ownership.
✓ As to amounts, it depends upon the needs ✓ As to amount, it depends upon the value of
of the government. the property leased.
✓ As to who can impose, only the ✓ As to who can impose, both the
government. government and private entities.

TAX DEBT
✓ Arises from law. ✓ Arises from private contracts.
✓ Non-payment of it leads to imprisonment. ✓ Non-payment of it does not lead to
✓ Cannot be set-off. imprisonment.
✓ Generally payable in money. ✓ Can be subject to set-off.
✓ It draws interest only when the taxpayer is ✓ Can be paid in kind.
delinquent. ✓ It draws interest when it is so stipulated by
the contracting parties or when the debtor
incurs legal delay.

TAX SPECIAL ASSESSMENT

✓ Amount imposed upon persons, properties
or privileges.
✓ It is levied without expectation of a direct
proximate benefit.
✓ Levied by the government on lands
adjacent to a public improvement.
✓ Imposed on land and is intended to
compensate the government for a part of
the cost improvement
✓ Basis: The benefit in terms of the
appreciation in land value caused by the
public improvement.
✓ It attaches to the land. It will not become a
personal obligation of the land owner.
Therefore non-payment of it will not result
to imprisonment of the owner.

TAX TARIFF
✓ Broader than tariff ✓ Amount imposed on imported or exported
✓ Amount imposed upon persons, properties commodities
or privileges.

TAX
✓ Amount imposed for the support of the
government.
✓ Only imposed by the government.
✓ It only arises from law.
PENALTY
✓ Amount imposed to discourage an act.
✓ It may impose by both the government and
private individuals.
✓ Arises from law or contract.
TAX SYSTEM
This refers to the methods or schemes of imposing, assessing, and collecting taxes. It includes all
the tax laws and regulations, the means of their enforcement, and the government offices, bureaus
and withholding agents which are part of the machineries of the government in tax collection.

The Philippine tax system is divided into two:

1. The national tax system
2. The local tax system

Types of Tax Systems according to impositions

1. Progressive – employed in the taxation of income of individuals.
2. Proportional – employed in taxation of corporate income, business and transfers of
properties by individuals.
3. Regressive – not employed in the Philippines

Types of Tax System According to Impact

1. Progressive system
It 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
This emphasizes indirect taxes. Indirect taxes are shifted by businesses to customers;
hence, the impact of taxation rests upon the bottom end of the society. In effect, a
regressive tax system is anti-poor.

It is widely believed that despite the constitutional guarantee of a progressive taxation, the
Philippines have dominantly regressive tax system due to the prevalence of business
taxes.

TAX COLLECTION SYSTEMS

A. 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.
The following are the withholding taxes collected under this system:

1. Creditable withholding tax

a. Withholding tax on compensation – an estimated tax required by the government to
be withheld (i.e. deducted) by employers against the compensation income to their
employees.
b. Expanded withholding tax – an estimated tax required by the government to be
deducted on certain income payments made by taxpayers engaged in business.

The creditable withholding tax is intended to support the self-assessment method to

lessen the burden of lump sum tax payment of taxpayer and also provides for a possible
third-party check for the BIR of non-compliant taxpayer.

2. Final withholding tax – a system of tax collection wherein payors are required to deduct
the full tax on certain income payment

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 and active
income
Who remits the actual tax? Income payor Income payor for the CWT
and the taxpayer for the
balance
Necessity of income tax Not required Required
return for taxpayer

B. Withholding system on business tax – when the national government agencies and
instrumentalities including government-owned and controlled corporations (GOCCs) purchase
goods or services from private suppliers, the law requires withholding of the relevant business
tax (i.e VAT or percentage tax).

C. Voluntary compliance system – the taxpayer himself determines his income, reports the
same through income tax returns and pays the tax to the government. This system is also
referred to as the “Self-assessment method.”

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

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

TAX ADMINISTRATION
It refers to the management of the tax system. Tax administration of the national tax system in the
Philippines is entrusted to the Bureau of Internal revenue (BIR) which is under the supervision and
administration of the Department of Finance.

Chief officials of the BIR

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal enforcement group
c. Information systems group
d. Resource Management group

POWERS OF THE BUREAU OF INTERNAL REVENUE

1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties and fines, and adjustment in all cases decided in its
favor by the courts.
3. Giving effect 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 of forms, receipts, certificates, stamps, etc. to proper officials.
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
Other agents tasked with tax collections or tax incentives related functions
1. Bureau of Customs

Function: To administer collection of tariffs on imported articles and collection of the Value
Added Tax on importation. Together with the BIR, the BOC is under the supervision of the
Department of Finance.

Headed by: Customs Commissioner

Assisted by:
a. 5 deputy Commissioner
b. 14 district Collectors

2. Board of Investments

Function:
o To lead the promotion of investments in the Philippines by assisting Filipinos and
foreign investors to venture and prosper in desirable areas of economic activities.
o It supervises the grant of tax incentives under the Omnibus Investment Code.
o It is an attached agency of the Department of Trade and Industry.

Composition
o 5 full-time governors, excluding DTI Secretary as its chairman. The President of the
Philippines shall appoint a vice chairman of the board who shall act as the BOI’s
managing head.

3. Philippine Economic Zone Authority

Function:
o To 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.
o PEZA registered enterprises enjoy tax holidays for certain years, exemption from import
and export taxes including local taxes.
o It is also an attached agency of the DTI
o Composition:
a. Headed by a director general
b. Assisted by 3 deputy directors

4. Local Government Tax Collecting Unit

Taxpayer classification for purposes of Tax Administration

1. Large taxpayers – under the supervision of the Large Taxpayer Service of the BIR National
Office.
2. Non-large taxpayers – under the supervision of the respective Revenue District Offices (RDOs)
where business, trade or profession of the taxpayer is situated.

Criteria for Large Taxpayers:

As to payment:
1. Value added tax At least P200,000 per quarter for the preceding year.
2. Excise tax At least P1,000,000 tax paid for the preceding quarter
 3. Income tax
4. Withholding tax
5. General percentage tax
6. Documentary Stamp Tax
At least P1,000,000 annual income tax paid for the preceding
year.
At least P1,000,000 annual withholding tax payments or
remittances from all types of withholding taxes.
At least P200,000 percentage tax paid or payable per quarter for
the preceding year.
At least P1,000,000 aggregate amount per year.

As to financial conditions Results of operations

1. Gross receipts or sales P1,000,000,000 total annual gross sales or receipts
2. Net worth P300,000,000 total net worth at the close of each calendar or
fiscal year
3. Gross purchases P800,000,000 total annual purchases for the preceding year
4. Top corporate taxpayer listed and published by SEC

Automatic classification of taxpayers as large taxpayers

1. All branches of taxpayers under the Large Taxpayer’s Service
2. Subsidiaries, affiliates and entities of conglomerates or group of companies of large taxpayer
3. Surviving company in case of merger or consolidation of a large taxpayer
4. A corporation that absorbs the operation or business in case of spin-off of any large taxpayer
5. Corporation with an authorized capitalization of at least P300,000,000 registered with SEC.
6. Multinational enterprises with an authorized capitalization or assigned capital of at least
P300,000,000
7. Publicly listed corporation
8. Universal, commercial and foreign banks (the regular business unit and foreign currency
deposit unit shall be considered one taxpayer for purposes of classifying them as large
taxpayer).
9. Corporate taxpayers with at least P100,000,000 authorized capital in banking, insurance,
telecommunication, utilities, petroleum, tobacco and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals

Reference:
Income Taxation 2019 edition (TRAIN LAW) by Rex B. Banggawan, CPA, MBA