CHAPTER 2

TAXES, TAX LAWS, AND TAX ADMINISTRATION

Chapter Overview and Objectives

This Chapter discusses tax laws, taxes, and their distinction from similar items, and the
administration of the tax system:

After this chapter, readers are expected to comprehend and demonstrate knowledge on the
following:
1. The type of taxation laws
2. Distinction among tax laws, revenue regulations, and rulings
3. Tax, its elements, and classifications
4. Distinction of tax from similar items
5. Tax system and its types
6. The principles of a sound tax system
7. How tax is administered
8. The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of Internal
Revenue (CIR) and the non delegated powers of the CIR
9. The criteria for selection of large taxpayers
TAXATION LAW
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 certain immunity from taxation.
Examples:
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

Sources of Taxations laws

1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and conventions with foreign countries
 8. Revenue Regulations

Types of Administrative Issuances

1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue Bulletins
6. BIR rulings

Revenue Regulations are issuances signed by the Secretary of Finance upon recommendation of
the Commissioner of Internal Revenue (CIR) 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 regulations are followed are formal pronouncements intended to clarify or explain The
tax law and carry out affect it's general provisions by providing details of administration an
procedure. Revenue regulation has the force an effect of a law, but is not intended to expand or
limit the application of the law otherwise, it is void.

Revenue Memorandum Orders (RMOs) are issuances that provide the 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 CIR 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 CIR 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 RMRs; otherwise, the Rulings are null and void
ab initio.

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 BIR
and other agencies/offices.

Revenue Bulletins (RB) refers to periodic issuances, notices, and official announcements of the
Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on
certain specific issues of law or administration in relation to the provisions of the Tax code,
relevant tax laws, and other issuances for the guidance of the public.

BIR rulings are official positions of the Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax loss.

Rulings are merely advisory or a sort of information service to the taxpayer such that none of
them is binding except the addressee and may be reversed by the BIR at anytime.
Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAD) Rulings
3. BIR rulings
4. Delegated Authority (DA) rulings

Generally accepted accounting principles (GAAP) vs. Tax Laws

Generally accepted accounting principles or GAAP are not laws, but are mere conventions of
financial reporting. They are benchmarks for the fair and relevant valuation and recognition of
income, expense, assets, liabilities, and equity of a reporting entity for general purpose financial
reporting. GAAP accounting reports are intended to meet the common needs of a vast number of
users in the general public.

Tax laws including rules, regulations, and rulings prescribed the criteria for tax reporting, a
special form of financial reporting which is intended to meet specific needs of tax authorities.

Taxpayers normally follow GAAP in recording transactions in their books. However, in the
preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of
conflict with GAAP.

NATURE OF PHILIPPINE TAX LAWS

Philippine tax law are civil and not political in nature. They are effective even during periods of
enemy occupation. They are lost of the occupied territory an not by the occupying enemy. Tax
payments made during occupations of foreign enemies are valid.

Our Internal Revenue laws are not panel in nature because they do not define crime. Their
penalty provisions are merely intended to secure taxpayers’ compliance.

TAX
Tax is an enforced proportional contribution levied by the lawmaking body of 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. Taxes 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 resident of 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 incidence
1. Direct tax – When both the impact of incidence of taxation rest upon the same tax
payer, the tax is said to be direct. The tax collected from the person who is intended
to pay the same. The statutory taxpayer is the economic taxpayer.
2. Indirect tax – When the tax is paid by any person other than the one who is intended
to pay the same, the tax is said to be indirect. This occurs in the case of business taxes
where the statutory taxpayer is not the economic taxpayer.

The statutory taxpayer is the person named by law to pay the tax. An economic taxpayer is the
one who actually pays the tax.

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

E. As to rate
1. Proportional tax – This is a flat or fixed rate tax. The use of proportional tax
emphasizes equality as it subjects all taxpayers with the same rate without regard to
their ability to pay.
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. In aids in lessening the gap between the
rich and the poor.
3. Regressive tax – This tax imposes decreasing tax rates as the tax base increase. This is
the total reverse of progressive tax. Regressive tax is regarded as anti-poor. It directly
violates the Constitutional guarantee of progressive taxation.
4. Mixed tax – This tax manifest tax rates which is a combination of any of the above
types of tax.

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

DISTINCTION OF TAXES WITH SIMILAR ITEMS

Tax vs. Revenue

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

Tax vs. License fee

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

License fee emanates from police power and is imposed to regulate the exercise of a privilege
such as the commencement of a business or a profession.

Taxes are imposed after the commencement of a business or profession whereas license fee is
imposed before engagement in those activities. In other words, tax is a post-activity imposition
whereas license is a pre-activity imposition.

Tax vs. Toll

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

The amount of tax depends upon the needs of the government, but the amount of toll is
dependent upon the value of the property leased.

Both the government and private entities impose toll, but private entities cannot impose taxes.

Tax vs. Debt

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

Tax draws interest only when the taxpayer is delinquent. Debt draw interest when it is so
stipulated by the contracting parties or when the debtor incurs legal delay.

Tax vs. Special Assessment

Tax is an amount imposed upon persons, properties or privileges. Special assessment is levied by
the government on lands adjacent to a public improvement. It is imposed on land only and is
intended to compensate the government for a part of the cost of the improvement.

The basis of special assessment is the benefit in terms of appreciation in land value caused by the
public improvement. On the other hand, tax is levied without expectation of a direct proximate
benefit.

Unlike taxes, special assessment attaches to the land. It will not become a personal obligation of
the land owner. Therefore, the non-payment of special assessment will not result to
imprisonment of the owner (unlike in non-payment of taxes).

Tax vs. Tariff

Tax is broader than tariff. Tax is an amount imposed upon persons, privilege, transactions, or
properties. Tariff is the amount imposed on imported or exported commodities.

Tax vs. Penalty

Tax is an amount imposed for the support of the government. Penalty is an amount imposed to
discourage an act. Penalty may be imposed by both the government and private individuals. It
may arise both from law or contract whereas tax arises from law.

TAX SYSTEM
The tax system refers to the method or schemes of imposing, assessing, and collecting taxes. It
includes all the tax laws and regulations, the means of their enforcement, and the government
offices, bureaus and withholding agents which are part of the machineries of the government in
tax collection. The Philippine tax system is divided into two: the national tax system and the
local tax system.

Types of Tax Systems According to Imposition

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

Types of Tax System According to Impact

1. Progressive system
A progressive tax system is one that emphasizes direct taxes. A direct tax cannot be
shifted. Hence, it encourages economic efficiency as it leaves no other resort to taxpayers
than to be efficient. This type of tax system impacts more upon the rich.
 2. Regressive system
A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by
business to consumers; hence, the impact of taxations 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 has a dominantly regressive tax system due to the prevalence of business
taxes.

TAX COLLECTION SYSTEMS

A. Withholding system on income tax – Under this collection system, the payor of the
income withholds or deducts the tax on the income before releasing the same to the payee
and remits the same to the government. The following 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 taxpayers.

2. Final withholding tax - A system of tax collection wherein payors are required to deduct
the full tax on certain income payments.

The final withholding tax is intended for the collection of taxes from income with high risk of
non-compliance.

Similarities of final tax an creditable withholding tax

a. In both cases , the in computer with holds 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.

Differences between FWT and CWT

Final Withholding Creditable Withholding Tax
Tax
Income tax withheld Full Only a portion
Coverage of withholding Certain passive Certain passive and active
income income
Who remits the actual tax Income payor Income payer 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 on percentage tax). Business taxation is discussed under
Business and Transfer Taxation by the same author.

C. Voluntary compliance system - under this collection 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.”

The tax due determined under this system will be reduced by:
a. Withholding tax on compensation withheld by employers
b. Expanded withholding taxes withheld by suppliers of goods or services

The taxpayer shall pay to the government any tax balance after such credit or claim refund or tax
credit for excessive tax withheld.

D. Assessment or enforcement system - under this collection system, the government

identifies noncompliant taxpayers, assesses 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.

PRINCIPLES OF A SOUND TAX SYSTEM

According to Adam Smith, governments should adhere to the following principles or canons to
evolve a sound tax system:
1. Fiscal adequacy
2. Theoretical justice
3. Administrative feasibility

Fiscal adequacy
Fiscal adequacy requires that the sources of government funds must be sufficient to cover
government costs. The government must not incur a deficit. A budget deficit paralyzes the
government's ability to deliver the essential public services to the people. Hence, taxes should
increase in response to increase in government spending.

Theoretical justice
Theoretical justice or equity suggests that taxation should consider the taxpayer’s ability to pay.
It also suggests that the exercise of taxation should not be oppressive, unjust , or confiscatory.

Administrative feasibility
Administrative feasibility suggests that tax laws should be capable of efficient and effective
administration to encourage compliance. Government should make it easy for the taxpayer to
comply by avoiding administrative bottlenecks and reducing compliance costs.

The following are applications of the principle of administrative feasibility:

1. E-filing and E-payment of taxes
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens or corporations
4. Accreditation or authorized agent banks in the filing and payment of taxes

TAX ADMINISTRATION
Tax administration 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 which is
under the supervision and administration of the Department of Finance.

Chief officials of the Bureau of Internal Revenue

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a. Operations group
b. Legal Enforcement group
c. Information System 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 judgments 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 and matters of taxation

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE

1. To interpret the provisions of the NIRC, subject to 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:
a. Disputed assessment
b. Refunds of internal revenue taxes, fees, or other charges
c. Penalties imposed
d. Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine, and take testimony of the persons to
effect tax collection
 Purpose: For the CIR ascertain
a. The correctness of any tax return or in making a return when none has been made by
the taxpayer
b. The tax liability of any person for any internal revenue tax or in correcting any such
liability
c. Tax compliance of the taxpayer

Authorized acts:
a. To examine any book, paper, record or other data relevant to such inquiry
b. To obtain on a regular basis any information 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, his employees, or any
person having possession and custody of his books of accounts and accounting records to
produce such books, papers, records or other data and to give testimony.
D. To take testimony of the person concerned, under oath, as may be relevant or material
to the inquiry
e. To cause revenue officers and employees to make canvass of any revenue district

4. To make assessment and prescribe additional requirement for tax administration and
enforcement.
5. To examine tax returns and determine tax due thereon

The CIR or his duly authorized representatives may authorize the examination of any
taxpayer and the assessment of the correct amount of tax. Failure to file a return shall
prevent the CIR from authorizing the examination.

Tax or deficiency assessments are due upon notice and demand by the CIR or his
representatives.

Returns, statements or declarations shall not be withdrawn but may be modified, changed
and amended by the taxpayer within three (3) years from the date of filing, except when a
notice for audit or investigation has been actually served upon the taxpayer.

When a return shall not be forthcoming within the prescribed deadline or when there is a
reason to believe that the return is false, incomplete or erroneous, the CIR shall assess the
proper tax on the basis of best evidence available.

In case a person fails to file a required return or other documents at the time prescribed
by law or willfully files a false or fraudulent return or other documents, the CIR shall
make or amend the return from his own knowledge and from such information obtained
from testimony. The return shall be presumed prima facie correct and sufficient for all
legal purposes.

6. To conduct inventory taking or surveillance.

7. To prescribe presumptive gross sales and receipts from a taxpayer 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.

The presumptive gross sales or received shall be derived from the performance of
similar business under similar circumstances adjusted for other relevant information.

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 concealed his property
d. Intending to perform any act tending to obstruct the proceedings for the collection of
the tax or render the same ineffective

The termination of the taxable period shall be communicated through a notice to the
taxpayer together with a request for immediate payment. Taxes shall be due and
payable immediately.

9. To prescribe real property values

The CIR is authorized to divide the Philippines into zones and prescribe real property
values after consultation with competent appraisers. The values prescribed are referred to
as zonal value.

For purposes of Internal Revenue taxes, fair value of real property shall mean whichever
is higher of:
a. Zonal value prescribed by the Commissioner
b. Fair market value as shown in the schedule of market values of the Provincial and
City Assessor’s Office

The NIRC previously used the assessed value which is merely a fraction of the fair
market value. Assessed value is the basis of the real property tax in local taxation.
The value to use now is the full fair value of the property.

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 a financial incapacity to pay tax in an application
for tax compromise

In cases of financial incapacity, inquiry can proceed only if the taxpayer waives his
privilege under the Bank Deposit Secretary Act.

12. To accredit and register tax agents

 The denial by the CIR of application for accreditation is available to the Department of
Finance. The failure of the Secretary of Finance to act on the appeal within 60 days is
deemed an approval.

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 a rank equivalent to a division
chief of an office

Non-delegated power of the CIR

The following powers of the Commissioner shall not be delegated:
1. The power to recommend the promulgation of rules and regulations to the Secretary of
Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing
rulings of the Bureau.
3. The power to compromise or abate any tax liability
Exceptionally, the Regional Evaluation Boards may compromise tax liabilities under the
following:
a. assessments are issued by the regional offices involving basic deficiency tax of
P500,000 or less, and
b. minor criminal violations discovered by regional and district officials

Composition of the Regional Evaluation Board

a. Regional Director as Chairman
b. Assistant Regional Director
c. Heads of the Legal, Assessment and Collection Division
d. Revenue District Officer having jurisdiction over the taxpayer

4. The power to assign and reassign Internal Revenue officers to establishment where
articles subject to excise tax are produced or kept.

Rules in assignments of revenue officers to other duties

1. Revenue officers assigned to an establishment where excisable articles are kept shall in
no case stay there for more than two (2) years.
2. Revenue officers assigned to perform assessment and collection function shall not remain
in the same assignment for more than three (3) years.
3. Assignment of Internal Revenue officers and employees of the Bureau to special duties
shall not exceed one (1) year.

Agents and Deputies for Collection of National Internal Revenue Taxes

The following are constituted agents for the collection of Internal Revenue taxes:
1. The Commissioner of Customs and his subordinates with respect to collection of national
Internal Revenue taxes on imported goods.
2. The head of appropriate government offices and his subordinates with respect to the
collection of energy tax.
3. Banks duly accredited by the Commissioner with respect to receipts of payments of Internal
Revenue taxes authorized to be made thru banks. This are referred to as authorized
government depositary banks (AGDB).

OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES

RELATED FUNCTIONS
1. Bureau of Customs
2. Board of Investments
3. Philippine Economic Zone Authority
4. Local Government Tax Collecting Unit

Bureau of Customs (BOC)

Aside from its regulatory functions, the Bureau of Customs is tasked 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.

The Bureau of Customs is headed by the Customs Commissioner and is assisted by the five
Deputy Commissioners and 14 District Collectors.

Board of Investments (BOI)

The BOI is tasked 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 . It
supervises the grant of tax incentives under the Omnibus Investment Code. The BOI is an
attached agency of the Department of Trade and Industry (DTI).

The BOI is composed of five full-time governors, excluding the 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.

Philippine Economic Zone Authority (PEZA)

The PEZA is created 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.
PEZA registered enterprises enjoy tax holidays for certain years, exemption from import and
export taxes including local taxes. The PEZA is also an attached agency of the DTI.

The PEZA is headed by a director general and is assisted by three deputy directors.

Local Government Tax Collecting Units

Provinces, municipalities, cities and barangays also imposed and collect various taxes to
rationalize their fiscal autonomy.

The special tax treatments of BOI-registered or PEZA-registered enterprises including the local
taxes imposed by local governments will be discussed under Local and Preferential Taxation by
the same author.

TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

For purposes of effective and efficient tax administration, taxpayers are classified into:
1. Large taxpayers – under the supervision of Large Taxpayer Service (LTS) of the BIR
National Office.
2. Non-large taxpayers – under the supervision of the respective Revenue District Offices
(RDOs) where the business, trade or profession of the taxpayer is situated.

Criteria for Large Taxpayers:

A. 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 year
3. Income tax – At least P1,000,000 annual income tax paid for the preceding year
4. Withholding Tax – At least P1,000,000 annual withholding tax payments or
remittances from all types of withholding taxes
5. Percentage Tax – At least P200,000 percentage tax paid or payable per quarter for the
preceding year
6. Documentary stamp tax – At least P1,000,000 aggregate amount per year

B. As to financial conditions and 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 the Securities and Exchange
Commission

Automatic classification of taxpayers as large taxpayers

The following taxpayers shall be automatically classified as large taxpayers upon notice in
writing by the CIR:
1. All branches of taxpayers under the large taxpayers service
2. Subsidiaries, affiliates, and entities of conglomerates or group of companies of a 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 the
SEC
 6. Multinational enterprises with an authorized capitalization or assigned capital of at least
P300,000,000
7. Publicly listed corporations
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,
telecommunications, utilities, petroleum, tobacco, and alcohol industries
10. Corporate taxpayers engage in the production of metallic minerals

CHAPTER 2: SELF-TEST EXERCISES

Discussion Questions
1. Distinguish tax law from tax exemption law.
2. Enumerate the sources of tax laws.
3. Explain the nature of Philippine tax law.
4. Distinguish the tax law, revenue regulations, and rulings.
5. Define tax and identify its elements.
6. What are the classifications of taxes? Enumerate and provide examples for each
classification.
7. Compare tax with revenue, license, toll, debt, special assessment, tariff, and penalty.
8. What is tax system? What are its types?
9. Enumerate the principles of a sound tax system. Explain each.
10. Enumerate the powers of the BIR.
11. Enumerate the non-delegated powers of the CIR.
Exercise Drill No. 1
Identify the type of tax that is described by the following:

1. A consumption tax collected by non-VAT business

2. Tax on gratuitous transfer of property of a living donor
3. Tax that decreases in rates as the amount or value of the
tax object increases
4. Tax collected upon persons who are not the statutory
taxpayers
5. Tax that is imposed based on the value of the tax object
6. Tax for general purpose
7. Tax impose by the national government
8. A tax on sin products or non-essential commodities
9. Imposed on the gratuitous transfer of property upon
death
10. Tax on residents of a country
11. Tax that remains at flat rate regardless of the value of the
tax object
12. Tax which is collected on a per unit basis
13. Tax is collected upon the statutory taxpayer
14. Tax imposed to regulate businesses or professions
15. Tax upon performance of an act or enjoyment of a
privilege

Exercise Drill No. 2

Identify which is described by the following:

1. It refers to all income collections of the government.

2. It is an imposition for the support of the government.
3. It is imposed upon land adjacent to public improvements.
4. It is imposed on imported and exported commodities.
5. It is a charge imposed prior to the commencement of
business or exercise of a profession.
6. It is a post-activity rather than a pre-activity imposition.
7. It is subject to compensation or off-set.
8. It is a charge for the use of other’s property.
9. It is an imposition intended to discourage an act.
10. It arises from contracts rather than from law.

Exercise Drill No. 3

Indicate the criteria for the selection of large taxpayer for each of the following:
As to payment Criteria
1. Value Added Tax
2. Excise Tax
3. Income Tax
4. Withholding Tax
5. Percentage Tax
6. Documentary Stamp Tax
As to conditions and operations
1. Gross receipts or sales
2. Net worth
3. Gross purchases

Multiple Choice – Theory: Part 1

1. When tax is collected upon someone who is effectively reimbursed by another, the tax is
regarded as
a. direct.
b. indirect.
c. personal.
d. illegal.
2. All are ad valorem taxes, except one. Select the exception.
a. Poll tax
 b. Estate tax
c. Real property tax
d. Capital gains tax on real property capital asset
3. Taxation power can be used to destroy
a. as a revenue measure.
b. even if the tax is invalid.
c. as an implement police power.
d. when the state is in dire need of funds.
4. Which is not a characteristic of tax?
a. It is an enforced contribution.
b. It is generally payable in money.
c. It is subject to assignment.
d. It is levied by the law-making body of the State having jurisdiction.
5. Which of the following is a local tax?
a. Value Added Tax
b. Real property tax
c. Documentary stamp tax
d. Other percentage taxes
6. Which is not a source of tax law?
a. CHED regulations
b. BIR rulings
c. Judicial decisions
d. Constitution
7. Tax as to purpose is classified as
a. Fiscal or regulatory
b. Direct or indirect tax
c. National or local tax
d. Specific or ad valorem tax
8. Tax as to incidence is classified as
a. Fiscal or regulatory
b. Direct or indirect tax
c. National or local tax
d. Specific or ad valorem tax
9. Tax as to source is classified as
a. Fiscal or regulatory
b. Direct or indirect tax
c. National or local tax
d. Specific or ad valorem tax
10. Which is not a nature of tax?
a. Enforced proportional contribution
b. Enforced within the territorial jurisdiction of the taxing authority
c. Levied by the lawmaking body
d. Generally payable in kind
11. Taxes that cannot be shifted by the statutory taxpayer are referred to as
 a. direct taxes.
b. indirect taxes.
c. business taxes.
d. personal taxes.
12. Which is a local tax?
a. Donor's tax
b. Professional tax
c. Documentary stamp tax
d. Excise tax
13. As to subject matter, taxes do not include
a. Property tax
b. Regulatory tax
c. Poll tax
d. Excise tax
14. A tax that is imposed upon the performance of an act, the enjoyment of a privilege or the
engagement in a profession is known as
a. income tax.
b. license.
c. excise tax.
d. transfer tax.
15. Which is a national tax?
a. Real property tax
b. Community tax
c. Income tax
d. Professional tax
16. Which of the following distinguishes license from tax?
a. Unlimited in imposition
b. Imposed for revenue
c. Does not renders business illegal
d. Pre-activity in application
17. Which is correct?
a. Taxes may be subject to compensation.
b. Toll, being a demand of ownership, is exercised only by private entities.
c. Dacion en pago and cession in payment are applicable to taxation.
d. Special assessment applies only when public improvement is made.
18. Tax as to determination of amount is classified as
a. Fiscal or regulatory
b. Direct or indirect tax
c. National or local tax
d. Specific or ad valorem tax
19. Tax classifications as to object do not include
a. Poll tax
b. Property tax
c. Regulatory tax
 d. Excise tax
20. A. Tax must not violate constitutional and inherent limitation.
B. Tax must be uniform and equitable.
C. Tax must be for public purpose.
D. Tax must be levied by the lawmaking body.
E. Tax must be proportionate in character.
F. Tax is generally payable in money.

Which of the above is/are not an essential characteristic of a valid tax?

a. All of the above
b. All except F
c. None, except F
d. None of the above
21. To limit the production of an environmentally harmful commodity, Congress passed a law
subjecting the sales of an environmentally unfriendly commodity to a P10/kilo tax but a 5%
tax is imposed on sales exceeding P100,000.
Which is incorrect?
a. The tax is a combination of an ad valorem tax and specific tax.
b. This is an example of a regulatory tax.
c. This is a national tax.
d. This is a local tax.
22. Which is not an excise tax?
a. Income tax
b. Community tax
c. Estate tax
d. Occupation tax
23. Which is an indirect tax?
a. Value added tax
b. Donor's tax
c. Income tax
d. Real property tax
24. Which is not an ad valorem tax?
a. Real property tax
b. Excise tax on cigar
c. Income tax
d. Donor's tax
25. A tax that is imposed based on per unit or per head basis is known as
a. Proportional tax
b. Specific tax
c. Ad valorem tax
d. Progressive tax
26. Tax as to rates excludes
a. Specific tax
b. Progressive tax
 c. Mixed tax
d. Proportional tax
27. Mr. A has a tax obligation to the government amounting to P80,000. Since he is leaving the
country, he entered into a contract with Mr. B wherein Mr. B shall pay the P80,000 tax in his
behalf. On due date, Mr. B failed to pay the tax. The BIR sent a letter of demand to Mr. A
which he refused to pay.

Which of the following statements is correct?

a. The government cannot enforce collection charges against Mr. A since he has validly
transferred his obligations to B under the contract.
b. The government can no longer run after Mr. A because he is already outside the
Philippine territory.
c. The government should wait until Mr. B becomes solvent again.
d. The government should force Mr. A to pay because taxes are non-assignable.
28. Philippine tax laws are, by nature,
a. political.
b. civil.
c. political and civil.
d. penal and civil.
29. Motor vehicles tax is an example of
a. Property tax t c.
b. Privilege tax
c. Income tax
d. Indirect tax
30. Which of the following statements is correct?
a. The Marshall Doctrine is not used in practice since it is unconstitutional.
b. An ex post facto tax law violates the constitution.
c. A tax bill personally drafted by the president shall become a law after approval by
congress.
d. It is in the public interest that errors of public officials should bind the government to
limit government abuse.
31. Tax rulings are issued by the
a. Secretary of Finance
b. Supreme Court
c. Court of Tax Appeals
d. Commissioner of internal Revenue
32. Which of the following is limited in application?
a. Tax laws
b. Revenue Regulations
c. Tax treaties
d. BIR Ruling
33. Which is not a source of tax law?
a. Judicial decisions
b. Revenue regulations
 c. Opinions of tax experts
d. Tax treaties and ordinances
34. Which issues revenue regulations?
a. Department of Finance
b. Congress
c. Commissioner of Internal Revenues
d. Commissioner of Customs
35. Which is not an element of tax?
a. It must be for public purpose.
b. It must not violate Constitutional or inherent limitation.
c. It must be progressive by nature.
d. It must be uniform and equitable.
36. Tax as to purpose does not include
a. Revenue
b. Sumptuary
c. Regulatory
d. Poll
37. When the impact and incidence of taxation are merged into the statutory taxpayer, the tax is
known as
a. Personal tax
b. Direct tax
c. Indirect tax
d. National tax
38. Tax as to object includes
a. Personal tax
b. Property tax
c. Excise tax
d. All of these
39. Which is not an indirect tax?
a. Duties
b. Impost
c. Excise tax
d. Personal tax
40. A tax that cannot be avoided is
a. Direct tax
b. Indirect tax
c. Specific tax
d. Personal tax
41. Statement 1: Taxes are voluntary contributions to the government.
Statement 2: Taxes are mandatory contributions to the government.

Which is correct?
a. Only statement 1 is correct.
b. Only statement 2 is correct.
 c. Both statements are correct.
d. Neither statement is correct.
42. Which is an indirect tax?
a. Other percentage tax
b. Income tax
c. Donor's tax
d. Estate tax
43. Income tax is not a/an
a. Ad valorem tax
b. Direct tax
c. Revenue tax
d. Property tax
44. A transfer tax is not a/an
a. Regressive tax
b. Ad valorem tax
c. National tax
d. Excise tax
45. Which of the following levy is fiscal or revenue by nature?
a. Tax law geared to phase out a deficit balance of the government.
b. Tax law intended to prohibit gambling in the Philippines.
c. Tax law intended to protect local industries.
d. Tax law supporting the development of a particular industry.

Multiple Choice - Theory: Part 2

1. Which is not an excise tax?
a. Income tax
b. Business tax
c. Personal tax
d. Transfer tax
2. Which of the following do not relate to tax?
a. Does not render business illegal when not paid
b. Arises from law rather than from contracts
c. Intended to cover cost of regulations
d. Intended for public purpose
3. A levy from a property which derives some special benefit from public improvement is
a. Special assessment
b. Eminent domain
c. Taxation
d. Toll
4. A. Government revenue may come from tax, license, toll and penalties.
B. Penalty may arise either from law or contracts.

Which is false?
 a. A only
b. B only
c. A and B
d. Neither A nor B
5. What distinguishes tax from license?
a. Tax is a regulatory measure.
b. Tax is a demand of ownership.
c. Tax arises from contract.
d. Tax is a post-activity imposition.
6. Which of the following distinguishes license from tax?
a. It is imposed under taxation power.
b. It is a charge for other's property.
c. Non-compliance to it will render businesses illegal.
d. It is generally payable in money.
7. The amount imposed is based on the value of the property
a. Eminent domain
b. License
c. Toll
d. Special assessment
8. Which is intended to regulate conduct?
a. Penalty
b. License
c. Police power
d. Toll
9. Toll exhibits all of the following characteristics, except one. Which 1s the exception?
a. Demand of ownership
b. Compensation for the use of another's property
c. Maybe imposed by private individuals
d. Levied for the support of the government
10. Which of the following is incorrect?
a. The collected tax is referred to as revenue.
b. Tax is the sole source of government revenue.
c. License is imposed before commencement of a business or profession.
d. Debt can be subject to compensation or set-off.
11. Debt as compared to tax
a. It is a demand of ownership.
b. It is not assignable.
c. It will not cause imprisonment when not paid.
d. It is generally payable in money.
12. Select the incorrect statement.
a. Tax may be unlimited in amount.
b. Non-payment of license renders the business illegal.
c. Special assessment is not a liability of the person owning the property.
 d. Special assessment can be imposed on building and other real right attaching or
pertaining to land.
13. Tax as to subject matter does not include
a. Real property tax
b. Personal tax
c. Excise tax
d. Regulatory tax
14. What distinguishes debt from tax?
a. Arises from contract
b. Never draws interest
c. Non-payment will lead to imprisonment
d. Generally payable in money

Multiple Choice - Theory: Part 3

1. The Commissioner of Internal Revenue is not authorized to
a. interpret the provisions of the National Internal Revenue Code.
b. promulgate Revenue Regulations.
c. terminate an accounting period.
d. prescribe presumptive gross receipts.
2. Which is not a power of the Commissioner of Internal Revenue?
a. To change tax periods of taxpayers
b. To refund internal revenue taxes
c. To prescribe assessed value of real properties
d. To inquire into bank deposits only under certain cases
3. The principles of a sound tax system exclude
a. Economic efficiency
b. Fiscal adequacy
c. Theoretical justice
d. Administrative feasibility
4. Which of the following best describes the effect of tax condonation?
a. It only covers the unpaid balance of a tax liability.
b. It is conditional on the taxpayer paying some portion of the unpaid tax.
c. It generally applies to all taxpayers.
d. All of these
5. Which is not an application of a principle of a sound tax system?
a. Taxes should adjust based on government needs.
b. Taxation should be progressive.
c. Taxation should encourage convenient compliance.
d. None of these
6. By which principle of a sound tax system is the elasticity in tax rates is justified?
a. Theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
 d. All of these
7. Violation of this principle will make a tax law invalid
a. Fiscal adequacy
b. Theoretical justice
c. Administrative feasibility
d. Economic consistency
8. Which of the following is not an application of the lifeblood doctrine?
a. The government has the right to select the object of taxation.
b. Taxation is the rule; exemption is the exception.
c. Claim for exemption is strictly construed against the taxpayer.
d. None of these
9. Which one of the following is the BIR not empowered to do?
a. Assess national taxes
b. Collect income, business and transfer taxes
c. Assess and collect local taxes
d. Enforce forfeitures, penalties and fines
10. Which principle demands that ax should be just, reasonable, and fair?
a. Theoretical justice
b. Fiscal adequacy
c. Administrative feasibility
d. Economic consistency
11. Which among the following powers of the Commissioner of Internal Revenue can be
delegated?
a. The power to conduct inventory surveillance
b. The power to recommend promulgation of revenue regulations.
c. The power to issue rulings of first impression.
d. The power to reverse a ruling, amend or modify an existing ruling.
12. The Commissioner of Internal Revenue is not empowered to
a. Make or amend a tax return for and in behalf of the taxpayer.
b. Obtain information and to summon, examine, and take testimony of persons to effect
tax collections.
c. Compromise tax liabilities of taxpayers.
d. Grant amnesty for erring taxpayers.
13. Which is true with tax amnesty?
a. It is unconditional.
b. It covers both criminal and civil liability of the taxpayer.
c. It applies for past and future non-compliance.
d. All of these
14. Which of the following may tax exemption come from?
a. Contract
b. Constitution
c. Law
d. All of these
15. Exemption based upon which of the following is repealable?
 a. Contract
b. Constitution
c. Law
d. None of these
16. Select the incorrect statement regarding tax amnesty and condonation.
a. In tax amnesty, violators are required to pay a portion of the tax assessed.
b. When the remaining unpaid portion of the tax is condoned, the taxpayer cannot ask
for refund for the balance already paid.
c. Tax amnesty operates as a general pardon and is rarely available.
d. Tax condonation operates on the whole balance of the assessed tax; hence, the
taxpayer can ask for refund for the paid portion of the tax.
17. Which of the following is a power of the Commissioner of Internal Revenue?
a. Assessment and collection of taxes
b. Enforcement of all forfeitures, penalties, and fines
c. Interpretation of the provisions of the NIRC
d. Giving effect to and administering the supervisory and police powers conferred by the
NIRC and other laws
18. The Commissioner of Internal Revenue can delegate the power to
a. refund or credit internal revenue tax.
b. recommend rules and regulations to the Secretary of Finance.
c. assign and re-assign revenue officer to establishments of excisable articles.
d. compromise or abate tax liability.
19. The BIR is under the supervision of
a. the Bureau of Customs.
b. the President.
c. the Department of Finance.
d. Congress.
20. Who is not a large taxpayer?
a. Mining companies
b. Listed companies
c. Banks with P120M authorized capital
d. None of these
21. In terms of financial measures, which of the following threshold for qualification as large
taxpayers is incorrect?
a. Gross receipts exceeding P1B
b. Net worth exceeding P300M
c. Gross purchases exceeding P800M
d. Gross sales exceeding P1.5B
22. As to tax payments measures, which of the following threshold for the qualification as large
taxpayer is incorrect?
a. Annual income tax payments of P1M
b. Annual value added tax payments of P1M
c. Quarterly percentage tax payments of P200,000
d. Annual documentary stamp tax of P1M