Notes Income Taxation

Rex Banggawan

CHAPTER II. Taxes, Tax Laws and Tax Administration

Taxation Laws and Tax Exemption Laws

Sources of Laws and Administrative Issuances
Nature of Philippine Tax Laws
Elements Tax
Classification of Taxes
Tax Distinguished with Similar Items
Tax System
Tax Collection System
Principles of Sound Tax System
Tax Administration
Power of the BIR and the CIR
Other agencies with tax related functions
Taxpayer Classification for purpose Tax Administration
Criteria for Large Taxpayers
Notes Income Taxation
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CHAPTER II. TAXES, TAX LAW AND TAX ADMINISTRATION

TAXATION LAW AND TAX EXEMPTION LAWS

Taxation Law – Refers to any law that arises from the exercise of
power of taxation by the state.

Type of Taxation Law

1. Tax Law – provides assessment and collection of taxes
Ex:
a. NIRC
b. TCC
c. Local Tax Code under the LGC
d. RPT Code
2. Tax Exemption Law – grants immunity from taxation
Ex:
a. The Minimum Wage Law
b. The Omnibus Investment Code
c. Barangay Micro-Business Enterprise
d. Cooperative Development Act

SOURCES OF LAW AND ADMINISTRATIVE ISSUANCES

Sources of Taxation Law

a. Constitution
b. Statues and Presidential Decrees
c. Judicial Decision and Case Laws
d. Executive Orders and Batas Pambansa
e. Administrative Issuances
f. Local Ordinances
g. Tax Treaties and Convention with foreign countries
h. Revenue Regulations

Types of Administrative Issuances

a. Revenue Regulations (RR)
b. Revenue Memorandum Orders (RMO)
c. Revenue Memorandum Rulings (RMR)
d. Revenue Memorandum Circulars (RMC)
e. Revenue Bulletins (RB)
f. BIR Rulings
(National internal
RR – signed by Secretary of Finance upon recommendation of the CIR
that specify, prescribe or define rules and regulation for effective
enforcement of NICR and related statues.
It is a formal pronouncement intended to clarify or explain a law
by providing details of administration and procedure.
It has the effect and force of law but NOT intended to expand or
limit the application of law, otherwise, void.
RMO – provides directives or instruction; guidelines; and outline
processes, operation, activities, workflow, programs of the BIR in
all operation except auditing.
Notes Income Taxation
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RMR – ruling, opinions and interpretations of the CIR with respect to

tax code or other tax laws
BIR ruling must not be contrary to RMR Memorandum Rulings,
otherwise, void.
RMC – pertinent and applicable portion as well as amplification of laws,
rules, regulations, and precedents, issued by the BIR and other
agencies. (Specific)
RB – periodic issuances, notices, and other announcements of the CIR
that consolidate BIR’s position on certain specific issues or
administration in relation to Tax Code and other relevant tax
laws.
(Dito nilalabas announcement)
BIR rulings – official position of the BIR raised by taxpayers and other
stakeholders relative to the clarification and interpretation of tax
law. ( Siya sumasagot sa tanong)
- Merely advisory and binding only to the addressee and may
be reversed by the BIR at any time.

Types of Rulings
1. VAT rulings
2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings

Generally Accepted Accounting Principles (GAAP) – conventions of

financial reporting, not a law. (
GAAP IS NOT A LAW
- They are benchmark for the fair and relevant valuation and
recognition of incomes, expenses, assets, liabilities, and
equity of a reporting entity for general purpose of
financial reporting.
- Tax law also provides criteria for tax reporting, or special
form of financial reporting which is intended to meet the
specific need s of tax authorities.
- Taxpayer normally use the GAAP in recording transactions in
their books but for the preparation of ITR, taxpayer is
mandated to follow the tax law in case of conflict with GAAP.

NATURE OF PHILIPPINE TAX LAW

-
Tax are civil in nature and not political.
-
It is also not penal in nature because it does not define
crimes. Penalty is only intended to secure payment of tax.
(WALANG KINALAMAN ANG POLITIKA SA TAXATION)

ELEMENTS OF TAX

- Tax is an enforced proportional contribution levied by the

lawmaking body of the state to raise revenue for public
purpose.
- To be valid, tax should have the following elements of Tax:

1. Must be levied by the taxing power who has

jurisdiction over the object.
2. Must not violate the constitutional and inherent
limitations.
3. Must be uniform and equitable.
4. Must be ror public purpose.
Notes Income Taxation
Rex Banggawan

5. Must be proportional in character

6. Generally payable in money.

CLASSIFICATION OF TAXES

A. As to Purpose:
1. Fiscal or revenue tax – general purpose
2. Regulatory – impose to regulate business, conduct, acts or
transaction.
3. Sumptuary – tax levied for some social or economic
objectives.

B. As to Subject Matter:
1. Personal, Poll or Capitation – tax on persons who are
residents of particular territory.
2. Property Tax – on property, real or personal.
3. Excise or Privilege Tax – tax on performance of an act,
enjoyment of an activity or engagement of occupation

C. As to incidence:
1. Direct – impact and incident are the same taxpayer. Collected
from person intended to pay the tax. Statutory taxpayer is
the Economic taxpayer.
2. Indirect – paid by any person other than the one who is
intended to pay. The Statutory Taxpayer is not the Economic
Taxpayer.
Statutory Taxpayer is the one named by law to pay.
Economic Taxpayer is the one who actually pays.

D. As to amount:
1. Specific Tax – tax on a fixed amount imposed on per unit
basis, such as kilos, liter or meter (custom)
2. Ad Valorem – tax on a fixed proportion imposed upon the
value of the tax object. (Value)

E. As to rate:
1. Proportional Tax – flat rate, subject all taxpayer to same rate
2. Progressive or Graduated Tax – tax increase as the tax base
increase. With regards to tax ability theory
3. Regressive Tax – tax decrease as the tax base increase, anti-
poor and it directly violates the progressive tax guaranteed by
the constitution.
4. Mixed Tax – combination of any of the above.

F. As to imposing authority:
1. National Tax – impose by the national government
Ex:
a. Income Tax – annual income, gain or profit
b. Estate Tax – gratuitous transfer of properties by
descendent upon death
c. Donor’s Tax – gratuitous transfer by living donor
d. Value Added Tax – consumption tax collected by
VAT business taxpayer
e. Other Percentage Tax – consumption tax by non-
VAT business taxpayer
f. Excise Tax – tax on sin products that are non-
essential commodities such as alcohol, (not same
with excise tax or privilege tax)
Notes Income Taxation
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g. Documentary Stamp Tax - tax on documents,

instruments, loan agreements and papers
evidencing acceptance, assignment, sale or
transfer of an obligation, right or property.
2. Local Tax – impose by local government units.
a. Real Property Tax
b. Professional Tax
c. Business Taxes, Fees and Charges
d. Community Tax
e. Tax on Bank and other Financial Institution

DISTINCTION OF TAXES AND WITH SIMILAR ITEMS

Tax vs. Revenues

- 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, license etc.
- The amount impose is TAX and amount collected is REVENUE

Tax vs. License Fee

- Tax is broad than license
- Tax emanates from power of taxation power while License
emanates from Police Power of the state
- Tax is imposed upon any subject such as person, property or
privilege to raise revenue, License is imposed to regulate the
exercise of a privilege as the commencement of a business or
profession
- Tax is imposed after the commencement of business (post-
activity) whereas, license is imposed before the
commencement (pre-activity).

Tax vs. Toll

- Tax is a levy of government and hence, it is a demand of
sovereignty
- Toll is a charge for the use of property, hence, demand of
ownership.
- The am amount of tax depends upon need of government
while the amount of toll depends upon the value of property
- Government exercise tax while in toll, the government and
private can exercise both.

Tax vs. Debt

- Tax arise from law, while Debt arise from private contracts.
- Non-payment of tax leads to imprisonment while no person
may be imprisoned for non-payment of debt.
- Not set-off for tax while set-off is allowed for debt.
- Debt can be paid in kind (dacion en pago) while tax is payable
in money in general.
- Tax draws interest only if the taxpayer is delinquent, while in
debt, interest is allowed if stipulated by the parties or when
debtor incurs in legal delay.

Tax vs. Special Assessment

- Tax is an amount imposed to persons, properties or privilege.
Notes Income Taxation
Rex Banggawan

- Special Assessment is imposed upon lands adjacent to a

public improvement. It is imposed to the land to compensate
the government from the cost of improvement.
- Tax is levied without expectation of a direct and proximate
benefit, while in Special Assessment, the basis is the benefit
of appreciation of the land value caused by the government
improvement.
- Special Assessment is attached to the land and not to the
person or owner of the land, hence, no imprisonment for non-
payment of Special Assessment.

Tax vs. Tariff

- Tax is broader than Tariff
- Tax is imposed upon person, property and privilege, while,
Tariff is imposed upon imported or exported commodities.

Tax vs. Penalty

- Tax is an amount imposed to support the government, while
Penalty is an amount imposed to discourage an act.
- Tax may be imposed by the government, while penalty may
be imposed by the government and private.
- Penalty may arise form law and contract while Tax arise only
from Tax.

TAX SYSTEM

Tax system refers to the method and schemes of imposing,

assessing and collecting taxes. It includes all 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. National Tax System
2. Local Tax System

Types of Tax System According to Imposition

a. Progressive – applied in taxation of income for individuals and
certain local taxes.
b. Proportional – applied in taxation of corporate income for
businesses.
c. Regressive – not employed in the Philippines.

Type of Tax System According to Impact

a. Progressive System – direct tax and cannot be shifted.
- Impact is to the taxpayer directly and against rich taxpayer.
b. Regressive – indirect tax often shifted by the businesses to
consumers.
- Impact is upon the bottom end hence, the society. Considered
anti-poor.

 Despite the Constitutional guarantee that the tax system is

Progressive, the Philippines has a dominant Regressive Tax
System because of the prevalent business taxes.

TAX COLLECTION SYSTEM

Notes Income Taxation
Rex Banggawan

A. Withholding System on Income Tax – the payor of the income will

withhold or deduct the tax income before releasing the income to
the payee and remit the same to the government.

1. Creditable Withholding Tax

a. Withholding Tax on Compensation – an estimate tax
required by the government to be withheld (deducted)
by the employer against the compensation income of
their employees.
b. Expanded Withholding Tax – an estimate tax required
by the government to be withheld from certain income
payments made by taxpayers engaged in the business.

2. Final Withholding Tax – a system of tax collection where the

payor are required to deduct the full tax on certain income
payments. Intended for high risk of non-compliance.

Similarities of FWT and CWT:

a. In both system, the payor withholds a fraction of the
income and remit the same to the government.
b. By collecting outright, it minimizes cash flow problem of
the taxpayer and collection problem of the government.
Difference between FWT = CWT:
a. Income tax withheld: Full = Only Portion
b. Coverage: Certain Passive Income = Certain Passive
and Active income
c. Who remits: Income payor = Income payor for CWT
and TP for the balance
d. Necessity of income tax return for TP: not required =
required

B. Withholding System on Business Tax – when the national

government agencies and instrumentalities including government-
owned and controlled corporations (GOCC) purchase goods and
services from private suppliers, the law requires the withholding of
the relevant business taxes like, VAT or percentage tax. Discussed
further under Business and Transfer Taxation.

C. Voluntary Compliance System – the TP himself determines his

income and report the same through Income Tax Return and pays
the tax to the government, “Self-assessment Method”.

D. Assessment and Enforcement System – the government identifies

non-compliant TP, assess their tax due including penalties and
demands voluntary compliance or enforce collections by coercive
force through summary (administrative) proceeding or judicial
proceedings.

PRINCIPLE OF A SOUND TAX SYSTEM

Government must adhere to the following principles or cannons to

evolve a sound tax system.
1. Fiscal Adequacy – the sources of government funds must be
sufficient to cover government cost. The government should not
incur deficit because it paralyzes the government’ ability to deliver
essential public services to the people. Hence, the tax increase as
the government expenses increase.
Notes Income Taxation
Rex Banggawan

2. Theoretical Justice – or theoretical equity suggests that the taxation

must be based on the ability to pay tax. Also the exercise of
taxation must not be oppressive, unjust and confiscatory.
3. Administrative Feasibility – it suggests that tax law should be
capable of efficient and effective administration to encourage
compliance. Government should make it easy for the taxpayer to
comply and avoid bottleneck reducing compliance costs.

The following are the application of principle of Administrative

Feasibility:
1. E-filing and e-payment
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens and foreign
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. Tax

administration of the national tax system in the Philippines is entrusted to
the Bureau of Internal Revenue (BIR) which is under the supervision of the
Department of Finance (DOF).

Chief Officials of the BIR

1. One (1) Commissioner
2. Four (4) Deputy Commissioners
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, fines and judgments
in all cases decided in favor of the government.
3. Applying and administering the supervisory and police power
conferred by the NIRC and other tax laws.
4. Assignment of Internal Revenue Officers and other employees
to other duties.
5. Provision and distribution of forms, receipts, certificates,
stamps, etc. to the proper officials.
6. Issuance of receipts and clearances.
7. Submission of annual reports, pertinent information to
Congress and reports to Congressional Oversight Committee
in matter s of taxation.

POWERS OF THE COMMISSIONER OF INTERNAL REVENUE (CIR)

1. To interpret the provisions of the NIRC, subject to the review

of Secretary of Finance (SOF).
2. To decide tax cases, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeal, such as:
a. disputed assessment;
b. refunds of internal revenue taxes, fees or other charges;
c. penalties imposed; and,
other NIRC and special law matters administered by BIR.
Notes Income Taxation
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3. To obtain information and to summon, examine and take

testimony of persons to effect tax collection.
a. Purpose: for the CIR to ascertain:
- Correctness of any tax return or in making a return
if no return
- tax liability of any person for internal revenue tax
or correcting any such liabilities.
- tax compliance of TP
b. Authorized acts:
- examine books, papers, records, documents and
other data relevant to such inquiry
- to obtain on a regular basis any information from
any other person other than the TP who is under tax
audit
- to take testimony of the person concerned, under
oath, as may be relevant to the inquiry
- to cause revenue officers and employees to make
canvass of any revenue district
4. To make an assessment and prescribe additional
requirements for tax administration and enforcement.
5. To examine tax returns and determine tax due thereon.
- power of the CIR or his authorized representative
to examine returns when there is deficiencies and
demand payment.
- when there is no return or false, incomplete or
erroneous, the CIR or AR shall asses the proper tax
on the basis of best evidence available.
- when the return is fraudulent, the CIR or AR shall
also make proper assessment.
6. To conduct inventory taking or surveillance.
7. To prescribe presumptive gross sales and receipts for TP
when:
a. TP failed to issue receipts;
b. When CIR believes that books or records do not correctly
reflects the declaration in the return.
* the presumptive gross sales or receipts shall be derived
from the performance of similar business under similar
circumstances adjusted for other relevant information.
8. To terminate tax period when TP is:
a. Retiring from business
b. Intending to leave the Philippines
c. Intending to remove, hide or conceal his property
d. Intending to perform an act tending to obstruct the
proceedings for the collection of the tax or render same
ineffective
*when terminating the tax period, the CIR or AR shall send a
notice, with request of payment of tax, to the TP. The tax
shall be due and demandable immediately.
9. To prescribe the real property value
- the CIR is authorized to divide the Philippines into zones and
prescribe real property values after consultation with
competent appraisers. The value prescribed are referred to as
Zonal Value.
- the Zonal Value is subject to automatic adjustment every 3
years through the rules and regulations issued by the SOF
based on the current Philippine valuation standard.
- the requirement of publication is mandatory before its
validity.
Notes Income Taxation
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- for purposes of internal revenue taxes, Fair Value of real

property shall be determined by whichever is higher from:
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.
* Assessed value is the basis in computing the Real Property
Tax under the local taxation. But for purposes of internal
revenue tax, the full fair value of the property is the basis.
10. To compromise tax liabilities of TP
With approval of the Evaluation of Board composed of
Commissioner and 4 Deputy Commissioner if:
a. Tax involved exceed P1,000,000.00 (1M); and,
b. The settlement offered is less than the prescribed
minimum rates.
11. To inquire bank deposit on the following:
a. Determination of gross estate of descendent; and,
b. To substantiate the TP’s claim for financial incapacity for
tax compromise.
12. To accredit and register tax agents
- denial is appealable to the SOF and the inaction for 60
days by the SOF is deem 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/her powers to any subordinate officer with
a rank equivalent to division chief of an office.

Non-delegated powers of the CIR:

1. Power to recommend rules and regulations to the SOF
2. Power to issue rulings of first impression or to reverse, revoke
or modify any existing rulings of the BIR
3. Power to compromise or abate any tax liability
Regional Valuation Board may compromise tax liability
under the following:
a. Assessment issued by regional offices involving basic
deficiency of P500,000.00 or less; and,
b. Minor criminal violations discovered by regional and
district officials
* Composition of RVB
1. Regional Director as chairman
2. Assistant Regional Director
3. Heads of Legal, Assessment and Collection
4. Revenue District Officer having jurisdiction over the
taxpayer
4. Power to assign and re-assign internal revenue officers (RO)
to establishments where articles subject to excise tax are
produced or kept.

Rules in assignment of revenue officers to other duties

1. RO assigned to an establishment shall not be more than 2
years.
2. RO assigned to perform assessment and collection function
shall not remain in the same assignment for more than 2 years.
3. Assignment of internal revenue officers and employees of the
Bureau to special duties shall not exceed 1 year.

Agents and deputies for collection of National Internal Revenue Taxes

Notes Income Taxation
Rex Banggawan

1. Commissioner of customs or his subordinates for collection of

national internal revenue taxes on imported goods.
2. Heads of appropriate government offices or subordinates for
collection of energy tax.
3. Banks duly accredited by the CIR with respect to receipts of
payments of internal revenue taxes authorized to be made thru
banks. Authorized Government Depositary Banks (AGDB)

OTHER AGENCY TASKED WITH COLLECTION OR TAX INCENTIVES

RELATED FUNCTIONS

1. Bureau of Customs – aside from regulatory function, BOC are also

tasked to administer the collection of tariff on imported articles and
collection of VAT on importation.
-Both under the DOF
-Headed by Commissioner and assisted by 5 Deputy
Commissioner and 14 District Collectors
2. Board of Investments – BOI is tasked to lead the promotion of
investment in the Philippines by assisting the 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.
- BOI is an attached agency of the DTI.
3. Philippine Economic Zone Authority – is created to promote
investment in export-oriented manufacturing industries in the
Philippines and other functions including the supervision of the grant of
fiscal and non-fiscal incentives.
- Headed by a Director General and as is assisted by 3 Deputy
Directors.
4. Local Government Tax Collecting Units – Provincial, cities and
municipalities and barangays also impose and collect various of local
taxes, fees and charges to rationalized their fiscal autonomy.
5. Fiscal Incentives Review Board – FIRB has oversight function on the
administration and grant of tax incentives by the Investment
Promotion Agencies and other government agencies administering tax
incentives.
- It approves and disapproves grant of tax incentives to private
entities and tax sub subsidies to government-owned and control
corporations, government instrumentalities, government
commissaries, state universities and colleges.

TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX

ADMINISTRATION

For purposes of effective and efficient tax administration, TPs are

classified into:
1. Large Taxpayer – under the supervision of Large Taxpayer Service
(LTS) of the BIR National Office
2. Non-Large Taxpayer – under the supervision of respective RDOs
where the business, trade or profession of the TP is situated.

CRITERIA FOR LARGE TAXPAYER

A. As to payment
1. VAT – at least P200K per quarter for the preceding year.
2. Excise Tax – at least P1M tax paid for the preceding year
Notes Income Taxation
Rex Banggawan

3. Income Tax – at least P1M annual income tax paid for the
preceding year
4. Withholding Tax – at least P1M annual withholding tax
payments or remittances from all types of withholding taxes
5. Percentage Tax – at least P200K percentage tax paid or
payable per quarter for the preceding year
6. Documentary Stamp Tax – at least P1M aggregate amount
per year
B. As to financial condition and results of operation
1. Gross Receipts or sales – P1B total annual gross sales or
receipts
2. Net Worth – P300M total net worth at the close of each
calendar or fiscal year
3. Gross Purchase – P800M total annual purchase for the
preceding year
4. Top Corporate Taxpayer listed and published by the SEC

Automatic classification of taxpayer as large taxpayer – the following

TPs shall be automatically classified as LTP upon notice of the CIR:
1. All branches of TPs under the Large Taxpayer’s Service
2. Subsidiaries, affiliates and entities or group of companies of a
large taxpayer.
3. Surviving company in case of merger and consolidation of a
large taxpayer.
4. A corporation that absorbs the operation or business in case
of spin-off of any large taxpayer.
5. A corporation with an authorized capitalization of at least
P300M registered with SEC.
6. Multinational enterprises with an authorized capitalization of
at least P300M.
7. Publicly listed corporations.
8. Universal, commercial and foreign banks.
9. Corporate TPs with at least P100M authorized capital in
banking, insurance, telecommunication, utilities, petroleum,
tobacco and alcohol industries.
10. Corporate TPs engaged in the production of metallic
minerals.