TAX COLLECTION SYSTEMS

A. WITHHOLDING SYSTEM ON INCOME TAX

- payment of income withholds

- deducts the tax on the income before releasing same to the payee and remits the same to the
government.

Withholding taxes collected under this system:

1. Creditable Withholding Tax

a. Withholding tax on compensation

- an estimated tax required by government to be withheld (i.e. deducted) by employers against

compensation income to their employees

b. Expanded withholding tax

- estimated tax required by government to be deducted on certain income payments made

taxpayers engaged in business

T‌ he 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-complicate taxpayers.

2. Final Withholding Tax

- a system of tax collection wherein payer’s required to deduct the full tax on certain income
payments
- The final withholding tax is intended for the collection of taxes fro income with high risk of
non-compliance.

Similarities of final tax and creditable withholding tax

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

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). 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 non-compliant taxpayers, assesses their tax
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.

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 suffi to cover government costs.
The government must not incur a deficit deficit that paralyzes the government’s ability to deliver the
essential public service the people. Hence, taxes should increase in response to the increase in
government spending.

THEORETICAL JUSTICE

Theoretical justice or equity suggests that taxation should consider the tax pay ability to pay. It also
suggests that the exercise of taxation should non oppressive, unjust, or confiscatory.

ADMINISTRATIVE FEASIBILITY

Administrative feasibility suggests that tax laws should be capable of efficient effective administration to
encourage compliance. Government should make easy for the taxpayer to comply by avoiding
administrative bottlenecks 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 of authorized agent banks for the filing and payment of taxes

TAX ADMINISTRATION

Tax administration refers to the management of the tax system. 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 Commissioner
 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

 A‌ ssessment and collection of taxes

 ‌Enforcement of all forfeitures, penalties and fines, and judgments in all a decided in its favor by
the courts
 ‌Giving effect to and administering supervisory and police powers conferred to it by the NIRC and
other laws Assignment of internal revenue officers and other employees to other duties
 ‌Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials
 ‌Issuance of receipts and clearances
 ‌Submission of annual report, pertinent information to Congress and reports to the
Congressional Oversight Committee in 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:
 Disputed assessments
 Refunds of internal revenue taxes, fees, or other charges
 Penalties imposed
 Other NIRC and special law matters administered by the BIR
3. To obtain information and to summon, examine, and take testimony of persons to effect tax
collection Purpose: For the CIR to 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 an assessment and prescribe additional requirement for 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 notwithstanding any law requiring the prior
authorization of any government agency or instrumentality. Failure to file a return shall p from
authorizing the examination.
 Tax or deficiency assessments are due upon notice and demand by the CIR his representatives.
 CIR Returns, statements or declarations shall not be withdrawn but may be modified, changed
and amended by the taxpayer within 3 years from the day of filing, except when a notice for
audit or investigation has been actual served upon the taxpayer.
 When a return shall not be forthcoming within the prescribed deadline when there is a reason
to believe that the return is false, incomplete erroneous, the CIR shall assess the proper tax on
the basis of best evide available.
 In case a person fails to file a required return or other documents at the ti prescribed by law or
willfully files a false or fraudulent return or ot documents, the CIR shall make or amend the
return from his own knowle and from such information obtained from testimony. The return
shall 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 for 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 1 correctly reflect
the declaration in the return.

The presumptive gross sales or receipt shall be derived from the performance of similar business under
similar circumstances adjusted for other relevance 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 conceal 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 thus prescribed I are referred to as zonal
value.
 Zonal values are subject to automatic adjustment once every 3 years through rules and
regulations issued by the Secretary of Finance based on the current Philippine valuation
standards. However, no adjustment in zonal valuation shall be valid unless published in a
newspaper of general circulation in the province, city or municipality concerned, or in the
absence thereof, shall be posted in the provincial capitol, city or municipal hall and in 2 other
conspicuous public places therein. Furthermore, the basis of any valuation, including the records
of consultations done, shall be public records open to the inquiry of any taxpayer.

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 of 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 Secrecy Act.

12. To accredit and register tax agents

The denial by the CIR of application for accreditation is appealable to Department of Finance. The failure
of the Secretary of Finance to act on 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 officer with a rank equivalent 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 Secretary of Finance.
 2. The power to issue rulings of first impression or to reverse, revoke or mo any existing rulings of
the Bureau.
3. The power to compromise or abate any tax liability Exceptionally, the Regional Evaluation
Boards may compromise tax liabili under the following:
a. Assessments are issued by the regional offices involving basic deficie 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 establishme where artides 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 kept shall in no case stay
there for more than 2 years.
2) Revenue officers assigned to perform assessment and collection function s not remain in the
same assignment for more than 3 years.
3) Assignment of internal revenue officers and employees reality, inter of the Bureau to special
duties shall not exceed 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. These 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
5. Fiscal Incentives Review Board
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 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 manufactur industries in the

Philippines and, among other myriads of functions, supervise grant of both fiscal and non-fiscal
incentives. PEZA registered enterprises enjoy tax holidays for certain years, exemption & import
and export taxes including local taxes. The PEZA is also an attached age of the DTI.
 The PEZA is headed by a director general and is assisted by three directors.

Local Government Tax Collecting Units

 Provinces, municipalities, cities and barangays also imposed and collect var local taxes, fees and
charges to rationalize their fiscal autonomy.
 The special tax treatments of BOI-registered or PEZA-registered enterprise including the local
taxes imposed by local governments will be discussed under Local & Preferential Taxation by the
same author.

Fiscal Incentive Review Board (FIRB)

 FIRB has oversight function on the administration and grant of tax incentives the Investment
Promotion Agencies and other government agencies administer tax incentives. It approves or
disapproves grant of tax incentives to private entities and tax subsidies to government-owned
and controlled corporation government instrumentalities, government commissaries, state
universities colleges.
TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION

For purposes of effective and efficient tax administration, taxpayers are classi into:

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 Reve 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 Taxpayer’s 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,
telecommunication, utilities, petroleum, tobacco, and alcohol industries 10. Corporate taxpayers
engaged in the production of metallic minerals