DON HONORIO VENTURA STATE UNIVERSITY

College of Business Studies

CHAPTER 2
TAXATION LAW
• Refers to any law that arises from the exercise of taxation power
TYPES of TAXATION LAWS
• Tax Laws – laws that provide for the assessment and collection of taxes
• Examples
• The National Internal Revenue Code
• The Tariff and Customs Code
• The Local Tax Code
• The Real Property Tax Code
TAXATION EXEMPTION LAWS
• Laws that grant certain immunity from that grant certain immunity from taxation
Example
1. Minimum Wage Law
2. The Omnibus Investment Code
3. Barangay Micro Business Enterprise
4. Cooperative Development Act
SOURCES OF TAXATION LAW
• Constitution
• Statues and Presidential Decrees
• Judicial Decisions or Case Laws
• Executive Orders
• Administrative Issuances
• Tax Treaties and conventions with foreign countries
• Revenue Regulations
TYPES OF ADMINISTRATIVE ISSUANCES
 • Revenue regulations
• Revenue memorandum orders
• Revenue memorandum rulings
• Revenue memorandum circulars
• Revenue Bulletins
• BIR rulings
REVENUE REGULATIONS
• 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
• 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)
• 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)
• 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
• official positions of the Bureau to queries raised by taxpayers and other stakeholders relative to
clarification and interpretation of tax loss.
TYPES OF RULINGS
• Value Added Tax (VAT) rulings
• International Tax Affairs Division (ITAD) Rulings
• BIR rulings
• 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
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
• Tax must be levied by the taxing power having jurisdiction over the object of taxation.
• Tax must not violate constitutional and inherent limitations.
• Tax must be uniform and equitable.
• Tax must be for public purpose.
• Tax must be proportional in character.
• Taxes generally payable in money.
CLASSIFICATION OF TAXES
As to purpose
Fiscal or Revenue tax – a tax imposed for general purpose
Regulatory – a tax imposed to regulate business, conduct, acts or transactions.
Sumptuary – a tax levied to achieve some social or economic objectives
CLASSIFICATION OF TAXES
As to subject matter

 Personal, poll or capitation – a tax on persons who are resident of particular territory
 Property tax – a tax on properties, real or personal
 Excise or privilege tax – a tax imposed upon the performance of an act, enjoyment of a privilege
or engagement in an occupation
As to incidence
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.
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.
As to amount
Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo,
liter or meter, etc.
Ad valorem tax – a tax of fixed proportion imposed upon the value of the tax
object.
As to rate
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.
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.
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.
Mixed tax – This tax manifest tax rates which is a combination of any of the above types of tax.
As to imposing authority
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..

As to imposing authority
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.
DISTINCTION OF TAXES WITH SIMILAR ITEMS
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.
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. The
Philippine tax system is divided into two: the national tax system and the local tax system.
TYPES OF TAX SYSTEMS ACCORDING TO IMPOSITION
Progressive – employed in the taxation of income individuals, and transfers of properties by individual
Proportional – employed in taxation of corporate income and business
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.
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.
.
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 AND CREDITABLE WITHHOLDING TAX
a. In both cases, the in income payor withholds a fraction of the income and remits the same to the
government.
b. By collecting at the moment cash is available, both serve to minimize cash flow problems to the
taxpayer and collection problems to the government.
   Final Withholding Tax Creditable Withholding Tax

Income tax withheld Full Only a portion

Coverage of withholding Certain passive income Certain passive and active income

Who remits the actual tax Income payor Income payer for the CWT and the
taxpayer for the balance

Necessity of income tax return Not required Required

for taxpayer

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.
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.”
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.

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.
OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES RELATED
FUNCTIONS
• Bureau of Customs
• Board of Investments
• Philippine Economic Zone Authority
• Local Government Tax Collecting Unit
TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION
• For purposes of effective and efficient tax administration, taxpayers are classified into:
• Large taxpayers – under the supervision of Large Taxpayer Service (LTS) of the BIR National
Office.
• 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:
As to payment
• Value Added Tax – At least P200,000 per quarter for the preceding year
• Excise Tax – At least P1,000,000 tax paid for the preceding year
• Income tax – At least P1,000,000 annual income tax paid for the preceding year
• Withholding Tax – At least P1,000,000 annual withholding tax payments or remittances from all
types of withholding taxes
 • Percentage Tax – At least P200,000 percentage tax paid or payable per quarter for the preceding
year
• Documentary stamp tax – At least P1,000,000 aggregate amount per year
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
Exercises
1. 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.
2. Which of the following is a local tax?
a. Value Added Tax
b. Real property tax
c. Documentary stamp tax
d. Other percentage taxes
3. Which is not a source of tax law?
a. CHED regulations
b. BIR rulings
c. Judicial decisions
d. Constitution
4. 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
5. 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
6. 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.
7. 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
8. 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.
9. Which is an indirect tax?
a. Value added tax
b. Donor's tax
c. Income tax
d. Real property tax
10. Which is not an ad valorem tax?
a. Real property tax
b. Excise tax on cigar
c. Income tax
d. Donor's tax
11. Motor vehicles tax is an example of
a. Property tax t c.
b. Privilege tax
c. Income tax
d. Indirect tax
12. Tax as to purpose does not include
a. Revenue
b. Sumptuary
c. Regulatory
d. Poll

13. 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.
14. 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
15. 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.
REFERENCES:

Income taxation (Laws, Principles and Application) by Rex B. Bangawan, CPA, MBA.