Chapter 2 - Taxes, Tax Laws and Tax Administration 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: ‘The type of taxation laws Distinction among tax laws, revenue regulations, and rulings ‘Tax, its elements, and classifications Distinction of tax from similar items ‘Tax system and its types ‘The principles of a sound tax system How tax is administered ‘The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of Internal Revenue (CIR) and the non-delegated powers of the CIR PNA wNE 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.0. 226) Barangay Micro-Business Enterprise (BMBE) Law d, Cooperative Development Act 35chaper2 Tats Tox Laws ad Tar Adinstaen Sources of Taxation Ls ‘ens ‘Sots an Preset Decrees | Jute Dessons eases Feat Orders and Bata Pambansa ‘Aminerave stances {al Ordnanes errata Conenins with foreign countries even Replat “ypesof Administrative ssuances 1 Revene reulatons 2 Revenue memorandum odes 4 Revense memrandum ngs Revenue memerandam curs evens bles ‘BIR rugs eenee Rguns ae isuances sped. ty the Secretary of Face pon Fconmendsion of the Commasone of tera Revenue (IN) th spe Fiber define rls and telat forthe fice enforcement the ronson te Nata neal ven Code (IR) aed reed utes. een eulationsare mal ronouncemets iaenedo arto explain theta Lind cy tc ge ry Pring ea of imi eco cpenterlmitaespiciin otelcoberwan tical Ievenve Memorandum Ora (RMO a6 unc at prove drecties Itosucions pene gudclnw and cutie prow, operations, ates, orton ett nd poceares ncaa f the implcrtsten of sated ces gels obetan pin nd programs he Breau al arf opersins ‘erpraucing venue Mamorendn Rig (MD) ace rags pons a tertion ine espa toe provisos eT Ct nd ter a ss ape ‘ps tec wth wont bled prensa ih Cay ‘Stoed RRS obese, e Ruling ae nllandvolgabiano [Revenoe Memorandum Creare (RCH ae tssnes ta pulehpertiet and “pple orton a wel tampons os rues teulatons a prcesas ‘aye Btn oer once: a % toves Tax Laws and Tax Admin cote? on puteine (98) eet perio wanes, nies and offi announcements < Eeisone of Interal Reverse that consolidate te Bea of. er gnome specif sus ot radmin fa eaton othe Be Tax Code, rsevat ax wand other snes forthe pian ee ome ee ei fi a at rd ye cert sais ie an trains PPro ed Tax VAT rans Yate onal Tax AM Division (TAD) rulings 1 nronrae yee Accepted Accounting Principles (GAAP) vs. Tax Laws seeered accounting princpes or GAAP ate ot laws, but are mere et ian reporting They are benchmarks for the ai and reewot cated recognition of Income expense, ase bbs, and ety Of 8 seo nt) for general prose ancl ering, GAAP accounting reports eg mee the common neds of vas umber of wes nthe general aie ener teva suding rules, regulation, and rags prescribe the criteria fr tax Ths as ay nape form of nancial reporting whichis itended to mes specie soft shorts. Tapers normally follow GAAP in recording transactions In ter, books corr in the preparation and ing of tax returns taxpayers ae mandated to fl ttt im eass of confit with GAAP. ATURE OF PHILIPPINE TAX LAWS Flip tx laws are cv and not polteal in nature. They ae fective ven ing pes ef enemy occupation, Tey re avs ofthe occupied terry and ye cui en. Ta amen made ringtone Dvr ral revenue ws are not penal in nature because they do not define Gin Tee peay provers are mel fended w see ner arCopter 2 Tavs, Tox ans and Tax Adistation aK “Tavis an enforced proprtonal contribution levied by the wmaking body oy, | ‘State to race revenue for public parpose. Elements of Valid Tax {Tax mast be levied by the taxing power having jurisdiction ovr the objec “Tax tnst not vilate Constitutional and inerent imitations Tax must be uniform and equitable Tax must efor public purpose ‘Tax must be proportional i character. “Taxis generally payable in money. Cassifcation of Taxes A Astopurpose 1. sal orrevnue tna tax imposed for general purpose 2. Regulatory ~ a tax iposed to regulate busines, conduc, ats oe 11 Simptuary ws vied achleve sume socioeconomic objectives | 1B Astosubjectmater 1 Personl poll or coptatn = a tax on persons who are residents a paruelarterrtory 2. Property tr taxon properties elo personal 3a or privilge taxa tax imposed upon the performance of an a, | enjoyment of prlege or engagement nan occapation © Astoictdence 1 Direct tax - When both the impact and incidence of tation rest upon the same taxpayer, the tx is sad to be direct The taxis collected fom the person wh i itended to pay the same. The statue taper Is he ‘conomic taxpayer. 2. Indirect tx - When the tas paid by any person other tan the oe wh 's intended to pay the same the tas sald to be niece. Ts occu a the cate of busines tues sthere the tatty taxpayer i not he ‘conomictpayer. ‘The statutory taxpayer isthe person named byw to pay the tx A conomictapayer ithe one who actual pays thet D. Aztoamount 4. Spc tax tax ofa fied amount imposed on per unt bass suchas per ll, Her or meter, et 2” ares Tox aWs an Tae Admit cote? Aarnsraton Ad voorem ~ 1 0 hed proportion se posed upon the ale of the tn hed tt Th hed at. The so preprna ‘nowt regard other aby tg pays! SPIES withthe sme rte 2. Progressive or graduated tor—Ths is tax which impose 2 the 1X base CEASE. The we of progenies aes Sat ntin aegis iris eseringte gap between the rhonda MOTE bE reste tt = TMs a Ingen dee 3 fidease, THs Is the total reverse of peop Easy tse reared os ant-oor. 1 drecty voles te Coster a sroaressive aration. ed tox This tx manifst txts whichisa combi ides Ti chs combination of ay ofthe sto imposing authority +e natal ~axmposed bythe national goverment 4 ae 6 Soon area ee ame 5 FR a a mate at ae ees 21 Soe peo a aes en or rem Aa ee ae ara a acm cmon Ieee patentee Say re ean | Sao ee See ie ee are — aaa eee ame te =coger 2 Tan Toe Las and To Adri 4. Community ta (2 Setontuns and other nana isin: DisTINCTION OF TANES WITH SIMILARITENS ‘Taxvs Revenue TE resto the amount imposed bythe goverment or publ PUOSE Ren TS’ Mame etectos ofthe goverment which icudes tne, FES Si penls and thers. The aunt imposed 6 bu the amg (Shes revenue ‘Taxys Leense fee ‘Tras beener subject han Nene. Tax emanates rom tation power and Taped upon sty object such a persons properties. oF PWGSC ray Lene fee emanates rom pac power dis imposed regu th exercise 2 peg sch she onencement of business 2 profsion. “ase ae impo afer the commencement of sins or profession wheres ‘cea posed eo engagement nose activites other word portant poston wheres eee apresey mpostion. Taxvs Toth Tatra ley of government hence, ti demand of snr Tl 3 charge forthe use ther’ propery hn ies comand ones ‘The amount ofa pends yon the neds fhe overnment bt he amount ef tos dependent upon the vale oh property ase Bot be government and pate ets impos ol but vat ens canaee Ta arses rom wwe deb ares fom pat contracts No-payment of ox Jeads to imprisonment, bu non-payment of debt does not lead to imprisonment. | | Deb can be subject se bat at snot Det cn ep in cine pay acta eer payable ancy “ax draws inert ony when the taxpayer 6 delingent. sb ds terest Snes roa splsted byte onraing pares or chen eden Teal dey Tavs. Tosa Ta ston owe i a seca Assessment Eo mp TTS an amount myred won pean, proper, oF pets: Spel o oent ved the venenatis ee assesment imponed on lind ony andi nade era ingore apt ft ot be aerement vos of seca assesment th benefit inter af the appre ia and ‘The based Dy the public improvement. On the other | is pout el demons "en ee cx spect assessment attaches othe land wl not be 7 see ese ot become 3 prs nan the Land oer, Therefore, he na payment of spec eer Ss mean ca eter a rat seit a ct depen era rat pe er Pa oom el ee ae fn eet a Pease ont etateh batt = ESTO te mts ef pig sng cole and the government ofes, bureaus and wtiholing gests which Err acta sypesot Tax Systems According to imposition PPgreave- employed Inthe tan of come of iva and certain easiness aes 2 oportonl~emplye in tation of orporte income and basiess 5 agement employed inthe Philippines {ypesot Tax System According to Impact 1 Pgresbe stem [ogresive to system fone that empasies rect aes. A et ta font be shied. Hence, encourages economic eficeny as eaves no ther ce to txpayers tha to belle Ts pe of tt yste impacts Ite pon the ch a»— > Chapter? Tes Tx Laws and Ta Adinsation 2 egress [veges tar stem i one that phases inet tn. nde {re Shted by bsnese to consumers bene the impact of ation ion the btm dhe acy eect 2 eee ta St fg per. ee widely elev tht despite the Constiationa guarantee of pro ‘aston, the Phllppines ha a dominantly egressive tx system de toy ‘TAXCOLLECTION sysTEMS 1 patente ee Sat rn name | Peet oe accra at eee Ee eco Eee aan Sone eat a stan Sete reer rtren ho rots tora posse hd pry chek fron compat 2 Fay fo te pe eer dct tm ‘The final withholding tax i intended for the clon of tates fom | income wih igri noncompliance 4 Siirtes ofa and creditable witboiingtax In both thence pap wibolss rc enone ad ns alec th moment Gi asst svt mina sh low rolensothetarpayer sd cleo rotems gurney cymes 2» Toes 10 LOW Ta Admit pillerences between FT and CT Foal nihoaig Gea Wino Giana eae | crane Na ecard |wusholding system on business tx - hen the atonal goverment 5% Wines and ntruentalties Inling goverment on an conaed poroions (CCH) purse pnd oes fm pate pps {requires wang ofthe rant bares te Ya orpeegs {ny gsi taton fs acsred under Dusan Toner Paton 67 Gece auth. otuntary compliance system ~ Under this cliton system, the taxpayer msl determines hs Income reports the ame through ct tx ete tuchpars the tax tothe goverment. This syste sao rtrd too uyfasessment method ‘he tax due determined under his sytem wl be rece by JP toting taxon compensation wield by employes i Expanded withholding tates withheld suppers of ods or services| ‘The taxpayer shal oy tthe government any tax lnc at sch ret oF Tim refund or tax rei for excessive ax withheld ‘Assessment or enforcement system - Under ths collocon system, the > Snrnment identifier nomcompbant taxpayers, aseses lr Ux des FRctoding penalties, demands for xpayer's voluntary compan or nfres Cobecions by coercive means such a2 summary proceding ot ju froceedings when necessary. PRINCIPLES OF A SOUND TAXSYSTEM eardingto Adam Sith goverment should adhere tothe folowing princes treanons to evolve a sound tx system: 1 iscaladequacy 2 Theoret jatice 3 Admmstratve easibityChapter 2 Tes. Ta Laws and Ta Adminstration Fiscal adequacy Foo oscy requires thatthe sources of government fds mst be su fo over povcmeat cost The gvernent mest not Incu # defi. A {har purayac the goverment bit to delve the essential publi serie ‘he ppl Hence, aes should icreab ln Fsponse t INES In overamen sending Theoredcal justice Theos pss or equ suggests a tation should consider the taxpayer {Diy to py. alo sugeest thatthe verse of tation should not be Sppressive anus or cnfetoy Administrative feasibil ‘Adminstrator set tht ax ws should be capable of fen and ‘fecve admiisravan to eeoirage camplance Government should make ty for the taxpayer to comply by avoiding administrate botdenecks ad Feluingcomplane cost ‘Thefolowingaesppleatonfthe pencil of administrative easily: 1 Elingand epaymentor es 2 Substtted ingsjstem foremploees 5. nal wthnldng aon nom resdet lens o corporations 4 Acrediatin of authorized ant banks forte Higa payment of taxes ‘TAX ADMINISTRATION Tar admiration refers to the management of the tax system. Tax ‘ministration of the natina tx stem nthe Pipes erred tothe Bureau of Internal Revenue which rund the person and amination of the Department of Finance, Chief metas ofthe Bureau oftnternalRevense 24 Deputy Commissioners, echo be designated tothe flowing Bb Legal toreement group Information tems Group 4 Resource Management Group ‘POWERS OF THE BUREAU OF INTERNAL REVENUE 1. Assessment and llecion of taxes 2. Enforcement of al fretares, penalties ands, and judgments al cases, ‘decided ns tavorby the courte Teves, Tax Laws and Tex Adrintaton csr? 1 neater ep crt cuipheeidagetts “PTH a pk pen peti nea a se ot toe peas tssasion of al FePOF. pertinent information oC Seer an mes ra oy rm commemorate ae ee pound vaca Ose uimecd pa Se eae ren tanto hehe Pema ; et eaten ae Se je faee caveat capa on SO ets adie a ee oe a purpose: For the CIR to ascertain: te correctness of any tax return orn mating» return when aoe hs tren made by the taxpayer by Theta liability of any person fr any internal enue tax rin cmecting nyse ably . Toveomplance othe taxpayer Authorized acts {f Toexamine any book paper record or ater dat televantto such ngry 4 Tobia ona regular Bats any information from any person ster than the person whose neral revenue tat laity subject aude To summon the person lable for tx or required to fe» return, bis employees or any person having possesion and casa of hs backs of fecnuns and accounting records to produce such bool, papers, records tater data and o give testimony 4 To take testimony of the person conceed, under oath, as may be relevant of materiale theingury «6 Tocause revenue ofcers and employes to make cava of any revense detrice 6shope 2 Toes. To Laws and Tax Admintaton 4 To make an assesment and preseribe aon requirement op ‘Mins and enforcement '5 Toexamine tv returns and determine ade there ‘TheCiR or his dy authorizedeepreentaies may authorize the examin Gheany tnpojer andthe asesament of the cOrect amount of tg fhxwtstandy any aw eqn he ror authorization ofa gerne, Sencar nse. Fae t le arta shall ot preven The Cy from authoring the examination Tax or defen ssesents are de pam nati and demand bythe CR | Recrns, statements oF declan shall nat be withirsm but maybe | ‘oie, changsd and amended by the taper win 3 years om he ae fling cet when note for sult Investigation bas been Stal Served pan he tga | When a return shall ot be fotoring within the prescribed deadline en thee wean to bee Wat the return fe ncmplete o romeo the CR shal assess the prope tat on the Bs of es eine Incase person also ea aque eur ote coments athe time prescribe by lw or wf les 2 fe or laude! return oF eter acumen te CR shall make o amend the et om how Keg and fom such information cenned rom tesinony. ee return sal fe resume prime ace comet and sufi! oral legal purpose 6 Toconductinvestry taingosuellnce ‘Toprescribe presumptive ros ses and recor a taper whe a "The npr tae tose ep Bh The CR bees that he Boks or ther records ofthe axa do ot Correct refs the decoration nth tar ‘The presumptive gros sles o rect shale derive rom he efrmance of smi sine ser st remeancs ested br Ober Man 8 Toturminate x period when he tapers 2 Retnng rom usnes 1. Intending tole the Phippnes © Imendng te remove de, roc roperty Tass Tat Laws ard To Admini woe? Aaisrstion in a en een een eta wanting en od pyable imme 4, topes el poperty alas ‘he IRs authorized to dvd he Pipes to ones and pes rel rt vals afer constationwitcompeten spain thea mem aero malate POET Tea Tren pate aT Fede Stes Scene em ae Sore ee eee ‘The NIRC previously used the assed vlu which s merely ection othe [armarke alu. Asessed valet the bai ofthe el property ta i oa ‘Bhton The vale tose now isthe fl farvale ef te propery 10 Tocompromis tx ables of axpayers 1 Toingire nto bank deposts only under the following stances 2 ‘Determination of the gros esate ofa decedent 1 Tosubstanate the taxpayer’ clam of fianl capac to pay tax inan 2oplaton for tx compromise tn eases of Banco ncapacty, ingly can growed only the tapayer ‘esis prvlge under the Bank Dost Secrecy Act. 12 Toacrett andregistertax agents a(Chapter 2 Tans Tax Laws ad Tax Adminstration ‘The denial by the CIR of application for acreditation is appeabbe ty y Deparment of Finance. The are ofthe Secretary of Finance to act on | appeal within 60 day s deemed an approval 13. To refund or creditinternal revenue aes 14 Toabate or cance tx labitiesin certain cases 15. Topreseribe atonal procedures or dcunentary requirements 16 To delegate his powers to any subordinate ofice wth a ankequlalent ny | isin chef ofan office Now delegated poweroftheci Thefalowag west Commision sal ate dpe 1 The power to recommend the prnlgaon of read regulon te | Sowa nance 2 The power se rng of iat npreon ora eve roe oF Ml 2By Singrngsotte Bae 3 Theponer coro or aban tx aby Excel the Regina ration Bards my compromise tite “under the following: mene 2 Aseria bythe repo ofces ring bv deny trot inoue od 1 Nhe cm le dsc yen andi fics Composition of the Regina Felton Bard 2 Resor! Director a chairman | Assistant Regional Dretor | © Heads ofthe Lal, Assessment and Collection Di Revenue District Oe tavingjrsdicion over he taxpayer 4. The power to asign and eas internal revenue ofr a extabshments here aries subject to ease tat re prodied or ep. Rules in assignments of revenue officers to othe des 1 Revenue offers assigned to an rtablishmen where ecb artes ae bepeshallia na case ty therefor ore than 29 2. Revenue ofcers assigned opecfrm assessment nd colton faction shall fot remainin there seinen fr more than 3 quote? T0 TOLLS nd Ta Adrien signet of itera revenue ofc & Mea des sl not exceed yey ME a the Bue to sand Depts fo Colleton of Raton tena edowing aT constied afr the coer ny ‘Commissioner of CuSloms and his sabrina, ‘Te onal tral even ates on ame ea of propriate govern, Te colection of energy mie duly accredited by the Commis ants of interal even tte author ay mered tas authored gvernment Revenue Taxes eral rvenetes ith espet elleon ea t ods fics and his subordinates with ep one with respec ty pect ores of edo be made tr banks These depot banks (ACD. y psouam ais estes ra sasha mares Seton, EN sy prea of Customs (900) rom ts oly functions, the Brea of Casts tasked wo administer ‘ono tarfs on imported ack and colton othe ae Added Tx on aaleuon Tether wih the BIR he BOC tuner te sypervion o the parent of Finance te Bure of Customs iheaed by the CatomsConmisicerand atta [Peeper Commissioners and 14 Dsl Calectrs tnestens (80) etl ted to lead the pronto fnesnent in he Pippi ‘Pig Fines and eign vets to vere an prsper idee ara onic aces supervise the roto tx lentes under he Ona ice Gte: The Ban ace ape of he Deparment aes Ings (OT. ‘he ols compost of fie false governors ecg the DT sera a thins The President ofthe Papin: shal api ce harman he ard who shale a the BOTS managingheod sChapter 2 Tv TaxLaws and Tax Adminsaton Plipine Econom Zone Authority (PEZA) | Fanepan is crested to promote investents in exportorented MIRUCary | ‘Rha ie the Phipmes and among other myriads of fnctions, Supervise fPanteboth alan ee ialnenes : EIA epstered enterprises eno to bldays fr certan years expo oy, fnpot ad export tes ncadng cal taxes. The PEZ sao an tached pen, tthe DTL ‘The PEZA ts headed by a recor general and is asbted Dy three depuy directors. Local Government Tax Collecting Unis Provinces munities, cts and tarangays ao imposed and olet varius Toca tases, fer and charges to faoalie the fiscal autonomy. ‘The speci tax treatments of PObtegstered or PEzA-egstred ener: {nding the laa aes rose by neal governments wil be Sscused under acl Praeenia Taxauon by the Same autho. Fiscal Incentive Review Board (FIRB) FIRB has oversight ncn onthe administration and rant of tx incentives by Sets rnd ences notre csi tar incenves. I approves or dapproves rant ax incetves 1 pate nts and ta sues to povemmentawred aod conta corporations, fvermentistrumertaltes,poverameatcommisaris, state univers nd alge: "TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMIMISTRATION For purposes of fete and elfen tax administration, apayers are asd 1 Large tarpoyers under the supers ofthe Large Taxsyer Servic (LTS) ofthe Bk atonal lc 12 Nonlorge tarpayers = under the supervision of the respecive Revenue Disc ces (RDO) where the business, ade or profession ef he taxpayer Iestuated Criteria for Large Taxpayers: | A. Astopayment 1. Value Added Tax-At est P20000 per quarter for he preedng year 2. Ente Tr Atlee P0000 ax ald forthe preceding year Taxes, Ta Laws ae Tax Admiistaton coe? pn Tox AES P0000 ann a 00 annul income tx a for the preceding year Yhtotieg Tax A east P0000 annua witb poy tances rallye of ihldng nes nn ER vntge fat” Atleast 200000 peretage ax Ree forthe preceding year TTS 8 Bld aye per mentary ame Ae : a 100.000 sara amount per year nana colons nd results of operations receptor soles P,000.000.00 ttt annua ue kL anol oss se or csp fcr worth P300:000.00 tot et werth ate cose each lend ge pated 4, os purchases P800,00000 ta sal prcase fr he peeing 1. Tipecrporate apy sed ond paiedyeSctes end xchrge commision oan dasa of tapoyers sarge taxpayers ing taxpayers shal be automaticaly slag npyes upon gy te a taxpayers under the Large TxpayerServie ‘itats and entities of cones group of companies fa ef ace inwit 1 tian sass, irgeuaer 1 ing company incase merger or conan ofa taxpayer 4 Sram tht aborbs the operation or buses ate of Spf of ny teeter Capron with winabe EC ah et enterprises with an authorized captalation or asigned cata of ‘ese ?20,000000 Fob sted corporations 1 aay Sommer and frig Danks (tbe reg bases unt nd foreign tare depost uni shal be considered ne tarpye fr purposes dasa ‘heaslarge taper) 4 Ciurteenpers witha least 20000000 autor pital nba lnovanes tlecommniation bles, petroleum, obo, an abo ndtes 1 Corporate taxpayers engaged athe production of metalic minerals a authorized captalzaton of est 20.0000 eee st