CHAPTER 02: Taxes, Tax Laws, and Tax Administration

TAXATION LAW  Revenue Memorandum Orders (RMOs)

 provide directives and instructions
 any law that arises from the exercise of the
 prescribe guidelines and outline
taxation power of the State
processes, operations, activities,
Types of Taxation Laws workflows, methods, and procedures
 necessary for implementing policies,
1. Tax laws goals, objectives, plans, and programs
a. The National Internal Revenue Code of the bureau in all areas of operation
(NIRC) except auditing
b. The Tariff and Customs Code.  Revenue Memorandum Rulings (RMRs)
c. The Local Tax Code  rulings, opinions, and interpretations of
d. The Real Property Tax Code the CIR regarding the Tax Code and
other tax laws
2. Tax exemption laws  applied to specific sets of facts to
provide taxpayer guidance on tax
a. The Minimum Wage Law
consequences in specific situations
b. The Omnibus Investment Code of 1987
 BIR Rulings cannot contravene issued
(E.0.226)
RMRs; otherwise, they are null and void
c. Barangay Micro-Business Enterprise
from the beginning (ab initio)
(BMBE) Law
 Revenue Memorandum Circulars (RMCs)
d. Cooperative Development Act
 publish pertinent and applicable
Sources of Taxation Laws portions, as well as amplifications of
laws, rules, regulations, and precedents
1. Constitution issued by the BIR and other
2. Statutes and Presidential Decrees agencies/offices
3. Judicial Decisions or case laws  Revenue Bulletins (RBs)
4. Executive Orders and Batas Pambansa  periodic issuances, notices, and official
5. Administrative Issuances announcements of the Commissioner of
6. Local Ordinances Internal Revenue
7. Tax Treaties and Conventions with  consolidate the BIR's position on
foreign countries specific issues of law or administration
8. Revenue Regulations in relation to the Tax Code and relevant
Types of Administrative Issuances tax laws for public guidance
 BIR Rulings
 Revenue Regulations (RRs)  official positions of the Bureau to
 issuances signed by the Secretary of queries raised by taxpayers and other
Finance upon the recommendation of stakeholders
the Commissioner of Internal Revenue  provide clarification and interpretation of
(CIR) tax laws
 specify, prescribe, or define rules and
regulations for the effective enforcement NOTE: Rulings are merely advisory or a sort of
of the National Internal Revenue Code information service to the taxpayer such that
(NIRC) and related statutes none of them is binding except to the
 clarify or explain tax law and carry into addressee and may be reversed by the BIR at
effect its general provisions by providing any time.
administrative and procedural details Types of Rulings
 have the force and effect of law, but
cannot expand or limit the application of 1. Value Added Tax (VAT) rulings
the law 2. International Tax Affairs Division (ITAD)
rulings
3. BIR rulings
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4. Delegated Authority (DA) rulings C. As to incidence
NATURE OF PHILIPPINE TAX LAWS 1. Direct tax - the statutory taxpayer is the
economic taxpayer
 Civil Nature of Tax Laws
2. Indirect tax - the statutory taxpayer is
o Philippine tax laws are civil, not political
NOT the economic taxpayer
in nature.  statutory taxpayer - the person
o They remain effective even during named by law to pay the tax
periods of enemy occupation.  economic taxpayer - the one who
o These laws are considered laws of the actually pays the tax.
occupied territory, not of the occupying
enemy. D. As to amount
o Tax payments made during foreign 1. Specific tax - a tax of a fixed amount
occupations are deemed valid. imposed on a per unit basis such a per
 Non-Penal Nature of Internal Revenue kilo, liter or meter, etc.
Laws 2. Ad valorem - a tax of a fixed proportion
o Internal revenue laws do not define imposed upon the value of the tax object
crimes.
o Penalty provisions are intended to E. As to rate
ensure taxpayer compliance, not to 1. Proportional tax
penalize. 2. Progressive or graduated tax
TAX 3. Regressive tax
4. Mixed tax
Elements of a Valid Tax
F. As to imposing authority
1. Tax must be levied by the taxing power
having jurisdiction over the object of 1. National tax
taxation. a. Income tax
2. Tax must not violate Constitutional and b. Estate tax
inherent limitations. c. Donor's tax
3. Tax must be uniform and equitable. d. Value Added Tax
4. Tax must be for public purpose. e. Other percentage tax
5. Tax must be proportional in character. f. Excise tax
6. Tax is generally payable in money. g. Documentary stamp tax
2. Local tax
Classification of Taxes a. Real property tax
b. Professional tax
A. As to purpose
c. Business taxes, fees, and charges
1. Fiscal or revenue tax - a tax imposed d. Community tax
for general purpose e. Tax on banks and other financial
2. Regulatory - a tax imposed to regulate institutions
business, conduct, acts or transactions
DISTINCTION OF TAXES WITH SIMILAR
3. Sumptuary - a tax levied to achieve
ITEMS
some social or economic objectives
 Tax vs. Revenue
B. As to subject matter
o Tax
1. Personal, poll or capitation  amount imposed by the government
2. Property tax for public purposes
3. Excise or privilege tax o Revenue
 all income collections of the
government, including taxes, tariffs,
licenses, tolls, penalties, etc

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 o Key Point: Tax is the amount imposed; assessment does not become a
revenue is the amount collected. personal obligation.
 Tax vs. License Fee  Tax vs. Tariff
o Tax o Tax
 imposed by taxation power on  imposed on persons, privileges,
persons, properties, or privileges to transactions, or properties
raise revenue o Tariff
o License Fee  imposed on imported or exported
 imposed by police power to regulate commodities
the exercise of a privilege, such as o Scope: Tax is broader than tariff.
starting a business or profession  Tax vs. Penalty
o Timing: Tax is a post-activity o Tax
imposition; license fee is a pre-activity  imposed for government support
imposition. o Penalty
 Tax vs. Toll  imposed to discourage certain acts,
o Tax can be imposed by government or
 levy of government, a demand of private individuals, can arise from
sovereignty, dependent on law or contract
government needs o Key Point: Penalty aims to deter
o Toll actions; tax aims to support government
 charge for the use of another's functions.
property, a demand of ownership,
TAX SYSTEM
dependent on the value of the
property  tax system - the methods or schemes of
o Key Point: Government and private imposing, assessing, and collecting taxes.
entities can impose tolls, but only the  The Philippine tax system is divided into
government can impose taxes. two: the national tax system and the local
 Tax vs. Debt tax system.
o Tax
 arises from law, non-payment can Types of Tax Systems According to
lead to imprisonment, not subject to Imposition
set-off, generally payable in money 1. Progressive - employed in the taxation of
o Debt income of individuals, and certain local
 arises from private contracts, non- business taxes
payment does not lead to
imprisonment, can be subject to set- 2. Proportional - employed in taxation of
off, payable in kind corporate income and business
o Interest: Tax draws interest when 3. Regressive - not employed in the Philippines
delinquent; debt draws interest if
stipulated or legally delayed. Types of Tax System According to Impact
 Tax vs. Special Assessment
1. Progressive system (direct tax)
o Tax
2. Regressive system (indirect tax)
 imposed on persons, properties, or
privileges without expectation of TAX COLLECTION SYSTEMS
direct benefit
A. Withholding System on Income Tax
o Special Assessment
 levied on land adjacent to public o Collection Method
improvements, based on the benefit  payor of the income withholds or
from increased land value deducts the tax before releasing the
o Obligation: Tax can lead to income to the payee and remits it to the
imprisonment for non-payment; special government

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Types of Withholding Taxes B. Withholding system on business tax
1. Creditable Withholding Tax  When the national government agencies
a. Withholding Tax on Compensation and instrumentalities including government-
 estimated tax withheld by employers owned and controlled corporations
on compensation income of (GOCCs) purchase goods or services from
employees private suppliers, the law requires
b. Expanded Withholding Tax withholding of the relevant business tax (ie.
 estimated tax deducted on certain VAT or percentage tax).
income payments made by taxpayers
C. Voluntary compliance system
engaged in business
 Purpose: Supports self-assessment "Self-assessment method"
method, reduces burden of lump sum
tax payment, and provides a possible The tax due determined under this system will
third-party check for the BIR on non- be reduced by:
compliant taxpayers. a. Withholding tax on compensation
2. Final Withholding Tax withheld by employers
 Full tax deducted by payors on certain b. Expanded withholding taxes withheld by
income payments. suppliers of goods or services
 Purpose: Collects taxes from income with a
high risk of non-compliance. D. Assessment or enforcement system

Similarities of Final Tax and Creditable  The government identifies non-compliant

Withholding Tax taxpayers, assesses their tax dues including
penalties, and demands voluntary
a. In both cases, the income payor withholds a compliance from the taxpayers.
fraction of the income and remit the same to the
government. PRINCIPLES OF A SOUND TAX SYSTEM
(accdg. to Adam Smith)
b. By collecting at the moment cash is
available, both serve to minimize cash flow 1. Fiscal Adequacy
problems to the taxpayer and collection  Government funds must be sufficient to
problems to the government. cover costs without incurring a deficit.
 A budget deficit hampers the
Differences between FWT and CWT government's ability to deliver essential
Final Creditable public services.
Withholding Withholding  Taxes should increase in response to
Tax Tax increased government spending.
Income tax Full Only a 2. Theoretical Justice (Equity)
withheld portion  Taxation should consider the taxpayer's
Coverage of Certain Certain ability to pay.
withholding passive passive and  The exercise of taxation should not be
income active income oppressive, unjust, or confiscatory.
Who remits Income payor Income payor 3. Administrative Feasibility
the actual for the CWT  Tax laws should be efficiently and
tax and the
effectively administrable to encourage
taxpayer for
compliance.
the balance
Necessity of Not required Required  Government should make compliance
income tax easy by avoiding administrative
return for bottlenecks and reducing compliance
taxpayer costs.

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Applications of the Principle of President-appointed vice chairman
Administrative Feasibility acting as the managing head
3. Philippine Economic Zone Authority
1. E-filing and e-payment of taxes
(PEZA)
2. Substituted filing system for employees
 promotes investments in export-oriented
3. Final withholding tax on non-resident
manufacturing industries
aliens or corporations
 supervises the grant of fiscal and non-
4. Accreditation of authorized agent banks
fiscal incentives
for the filing and payment of taxes
 PEZA-registered enterprises enjoy tax
TAX ADMINISTRATION holidays and exemptions from
import/export and local taxes
 the management of the tax system  attached to the DTI
NOTE: The administration of the national tax  headed by a Director General, assisted
system in the Philippines is entrusted to the BIR by three Deputy Directors
which is under the supervision and 4. Local Government Tax Collecting Units
administration of the DoF.  provinces, municipalities, cities, and
barangays impose and collect various
Chief Officials of the Bureau of Internal local taxes, fees, and charges to
Revenue maintain fiscal autonomy
 special tax treatments for BOI-registered
1. 1 Commissioner
or PEZA-registered enterprises are
2. 4 Deputy Commissioners, each to be managed under Local & Preferential
designated to the following: Taxation
5. Fiscal Incentive Review Board (FIRB)
a. Operations group  oversees the administration and grant of
b. Legal Enforcement group tax incentives by Investment Promotion
c. Information Systems Group Agencies and other government
d. Resource Management Group agencies
OTHER AGENCIES TASKED WITH TAX  approves or disapproves tax incentives
COLLECTIONS OR TAX INCENTIVES for private entities and tax subsidies for
RELATED FUNCTIONS government-owned and controlled
corporations, government
1. Bureau of Customs (BOC) instrumentalities, government
 administers the collection of tariffs on commissaries, state universities, and
imported articles and Value Added Tax colleges
on importation
 functions under the supervision of the TAXPAYER CLASSIFICATION FOR
Department of Finance alongside the PURPOSES OF TAX ADMINISTRATION
BIR 1. Large taxpayers - under the supervision of
 led by the Customs Commissioner, with the Large Taxpayer Service (LTS of the BIR
five Deputy Commissioners and 14 National Office)
District Collectors
2. Board of Investments (BOI) 2. Non-large taxpayers - under the supervision
 promotes investments in the Philippines of the respective Revenue District Offices
by assisting both Filipino and foreign (RDOS) where the business, trade or
investors profession of the taxpayer is situated
 supervises the grant of tax incentives
under the Omnibus Investment Code.
 attached to the Department of Trade
and Industry (DTI)
 composed of five full-time governors
and chaired by the DTI Secretary, with a

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Criteria for Large Taxpayers 6. Multinational enterprises with an authorized
capitalization or assigned capital of at least
A. As to payment
P300,000,000
1. Value Added Tax - At least P200,000 7. Publicly listed corporations
per quarter for the preceding year 8. Universal, commercial, and foreign banks
2. Excise Tax - At least P1,000,000 tax (the regular business unit and foreign
paid for the preceding year currency deposit unit shall be considered
3. Income Tax - At least P1,000,000 one taxpayer for purposes of classifying
annual income tax paid for the them as large taxpayer)
preceding year 9. Corporate taxpayers with at least
4. Withholding Tax - At least P1,000,000 P100,000,000 authorized capital in banking,
annual withholding tax payments or insurance, telecommunication, utilities,
remittances from all types of withholding petroleum, tobacco, and alcohol industries
taxes 10. Corporate taxpayers engaged in the
5. Percentage tax - At least P200,000 production of metallic minerals
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

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