CHAPTER 2: TAXES, TAX LAWS AND TAX ADMINISTRATION

Taxation Law

 Refers to any law that arises from the exercise  Formal pronouncements intended to clarify or
of the taxation power of the state explain tax law and carry it into effect its
general provisions
Types of Taxation Laws
o By providing details of administration
Tax Laws and procedure
 Has the force and effect of a law
 Laws that provide for the assessment and
 But not intended to expand or limit the
collection of taxes
application of the law
o Examples
o Otherwise, it is void
 The National Internal
Revenue Code (NIRC) Revenue Memorandum orders (RMO’s)
 The Tariff and Customs Code
 Issuances that
 The Local Tax Code
o provide directions or instructions
 The Real Property Tax Code
o prescribe guidelines
Tax Exemption Laws o outlines
 processes
 Laws that grant certain immunity from
 operations
taxation
 activities
o Examples
 workflows
 Minimum Wage Law
 methods
 The Omnibus Investment
 procedures
Code of 1987 (E.O. 226)
 necessary in the
 Barangay Micro-Business
implementation of
Enterprise (BMBE) Law
o stated
 Cooperative Development Act
policies
Sources of Taxation Laws o goals
o objectives
 Constitution
o plans
 Statutes and Presidential Decrees
o programs of
 Judicial Decisions or case laws
the Bureau
 Executive Orders and Batas Pambansa
 in all areas of
 Administrative Issuances
operation except
 Local Ordinances
auditing
 Tax Treaties and Conventions with foreign
countries Revenue Memorandum rulings (RMRs)
 Revenue Regulations
 Rulings, opinions and interpretations of the
Types of Administrative Issuances CIR
o With respect to the provisions of the
Revenue Regulations
Tax Code and other tax laws as
 Issuances signed by the Secretary of Finance applied to specific set of facts
o Upon the recommendation of the  With or without established
Commission of Internal Revenue (CIR) precedents
 Specify, prescribe or define  Which the CIR issue
rules and regulations from time to time
 For the effective  For the purpose of
enforcement of the providing taxpayers
NIRC and related guidance on the
statuses consequences in
specific situations
  BIR rulings cannot contravene duly issued GAAP vs Tax Law
RMRs
 GAAP
o Otherwise, the rulings are null and
o Are not laws
void ab initio
o Mere conventions of financial
Revenue Memorandum circulars (RMCs) reporting
o Benchmarks for the fair and relevant
 Are issuances that publish pertinent and
valuation and recognition of income,
applicable portions
expenses, assets, liabilities and equity
o as well as amplifications of laws, rules,
of a reporting entity
regulations and precedents
 For general purpose financial
 Issued by the BIR and other
reporting
agencies/offices
o GAAP accounting reports
Revenue Bulletins  Are intended to meet the
common needs of a vast
 Refers to periodic issuances, notices, and number of users
official announcements of the CIR
 In the general public
o That consolidates the BIR’s position on
 Tax Laws
certain specific issues of law or
o Including rules, regulations and
administration
rulings
 In relation to the provisions
 Prescribe the criteria for tax
of:
reporting
 Tax Code
 A special form of
 Relevant tax laws
financial reporting
 Other issuances for  Which is intended to meet
the guidance of the specific needs of tax
public authorities
BIR Rulings o Taxpayers normally follow GAAP in
recording transactions in their books
 Are official positions of the Bureau to queries  However, in the preparation
by and filing of tax returns
o Taxpayers  Taxpayers are
o Other stakeholders mandated to follow
 Relative to clarification and tax laws
interpretation of tax laws o In cases of
 Rulings conflict with
o Are merely advisory or a sort of GAAP
information service to the taxpayer
o None of them are binding Nature of Philippine Tax Laws
 Except to the addressee and  Civil and not political in nature
may be reversed by the BIR at  Effective even during periods of enemy
anytime occupation
Types of Rulings  Laws of the occupied territory and not by the
occupying enemy
1. Value Added Tax (VAT) Rulings  Tax payments made during occupations of
2. International Tax Affairs Division (ITAD) foreign enemies are valid
Rulings  Internal Revenue Laws
3. BIR Rulings o Not penal in nature
4. Delegated Authority (DA) Rulings  Because they do not define
crime
 o Their penalty provisions are merely
intended
 To secure taxpayer’s
compliance
Tax
 Is an enforced proportional contribution
o 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 the Constitutional and
inherent limitation
 Tax must be uniform and equitable
 Tax must be for public purpose
 Tax must be proportional in character
 Tax is generally payable in money
Classification of Taxes
A. As to purpose
 Fiscal or Revenue Tax
o A tax imposed for general
purpose
 Regulatory
o Imposed to regulate
 Business
 Conduct
 Acts
 Transactions
 Sumptuary
o Levied to achieve some social or
economic objectives
B. As to subject matter
 Personal, poll or capitation
o Tax on persons who are residents
of a particular territory
 Property tax
o Tax on properties
 real or personal
 Excise or privilege tax
o Tax imposed on:
 The performance of an
act
 Enjoyment of a privilege
 Engagement in an
occupation
C. As to incidence
 Direct tax
o When both the impact and
incidence of taxation rests upon
the same taxpayer
o Tax is collected from the person
who is intended to pay the same
o The statutory taxpayer is the
economic taxpayer
 Indirect tax
o When the tax is paid by any
person other than the one who is
intended to pay the same
o This occurs in the case of business
taxes
o The statutory taxpayer is not the
economic taxpayer
o Statutory taxpayer
 The person named by the
law to pay the tax
o Economic taxpayer
 The one who actually
pays the tax
D. As to amount
 Specific Tax
o A tax of a fixed amount imposed
on a per unit basis
 Per kilo, liter or meter
 Ad Valorem
o A tax of a fixed proportion
imposed upon the value of the
tax object
E. As to rate
 Proportional tax
o Flat or fixed rate tax
o Emphasizes equality as it subjects
all taxpayers with the same rate
 Without regard to their
ability to pay
 Progressive or graduated tax
o A tax which imposes increasing
rates as the tax base increase
o Results in equitable taxation
 Because it gets more tax
from those who are more
capable
o Aids in lessening the gap between
the rich and the poor

 Regressive tax
o Imposes decreasing tax rates as
the tax base increase
o Total reverse of progressive tax
o Regarded as anti-poor
o Directly violates the
Constitutional guarantee of
progressive taxation
 Mixed Tax
o Manifests tax rates which is a
combination of any of the above
types of tax
F. As to imposing authority
 National Tax
o Tax imposed by the national
government, such as
o Income Tax
 Tax on annual income,
gains or profits
o Estate Tax
 Tax on gratuitous transfer
of properties
 By a decedent
upon death
o Donor’s Tax
 Tax on gratuitous transfer
of properties
 By a living donor
o Value Added Tax
 Consumption tax
collected by VAT business
taxpayers
o Other percentage tax
 Consumption tax
collected by non-VAT
business taxpayers
o Excise Tax
 Tax on sin products and
non-essential
commodities
 Such as
 Alcohol
 Cigarettes
 Metallic minerals
 Differentiated with
privilege tax which is also
called excise tax
o Documentary stamp tax
 Tax on documents,
instruments, loan
agreements and papers
 Evidencing the
acceptance,
assignment sale
or transfer of an
obligation
 Local Tax
o Tax imposed by the municipal or
local government
 Real Property Tax
 Professional Tax
 Business Tax, Fees and
charges
 Community Tax
 Tax on banks and other
financial instruments
Distinction of taxes with similar items
Taxes vs. Revenue
Tax Revenue
Refers to all income
collections of the
Amount imposed by the
government which
government for public
includes taxes, tariffs,
purpose
licenses, toll, penalties
and others
Amount imposed Amount collected
Taxes vs. License Fee
Tax License Fee
Broader subject than
license
Emanates from taxation Emanates from police
power power
Imposed to regulate the
Imposed upon any
exercise of a privilege
object such as persons,
such as the
properties or privileges
commencement of a
to raise revenue
business or profession
Imposed after the Imposed before the
commencement of a engagement in those
business or profession activities
Post activity imposition Pre activity imposition
Taxes vs. Toll
Tax Toll
Levy of a government Use of other’s property
Demand of sovereignty Demand of ownership
Amount depends upon Amount dependent
the needs of the upon the value of the
 government property leased
Imposed by both the
Imposed by the
government and private
government
entities

Taxes vs. Penalty

Taxes vs. Debt
Tax License Fee Imposed for the support
Arises from private
Arises from law
contracts
Non-payment leads to Nonpayment does not
imprisonment lead to imprisonment
Cannot be subject to set
Can be subject to set-off
off
Generally payable in
Can be paid in kind
money
Draws interest when it Tax System
is so stipulated by the
Only has interest when
contracting parties or
taxpayer is delinquent
when debtor incurs
legal delay
Taxes vs. Special Assessment
Tax Special Assessment
Levied by the
Is an amount imposed
government on lands
upon persons,
adjacent to a public
properties, or privileges
improvement
Imposed on land only
and is intended to
compensate the
government for a part of Types of Tax Systems according to Imposition
the cost of the
improvement
Basis is the benefit in
Levied without terms of the
expectation of direct appreciation in land
proximate benefit value caused by public
improvement
Not attached to the land Attaches to the land
Will not become a
personal obligation of
Nonpayment results to
the landowner;
imprisonment
nonpayment does not
result to imprisonment
Tax Penalty
Imposed to discourage
of the government an act
May be imposed by
both the government
and private individuals
May arise both from law
Arises from law
or contracts
 Refers to the methods or schemes of
imposing, assessing and collecting taxes
 Includes:
o All tax laws and regulations
o Means of their enforcement
o Government Offices, bureaus and
withholding agents
 Which are part of the
machineries of the
government in tax collection
 Philippine tax system is divided into two
o National tax system
o Local tax system
 Progressive
o Employed in the:
 Taxation of income of
individuals
 And certain local business
taxes
 Proportional
o Employed in taxation of corporate
income and business
 Regressive
o Not employed in the Philippines

Types of Tax Systems according to Impact

Taxes vs. Tariff  Progressive System
Tax Tariff o One that emphasizes direct taxes
Arises from private o Direct taxes cannot be shifted
Broader than tariff
contracts o Thus, encourages economic efficiency
Amount imposed upon Amount imposed on
 As it leaves no resort to
persons, properties, or imported or exported
taxpayers than to be efficient
privileges commodities
 o This tax system impacts more on the
rich
 Regressive System
o One that emphasizes indirect taxes
o Shifted by businesses to consumers
o Impact of taxation rests upon the
bottom end of the society
 Therefore, anti-poor
 Note:
o Despite the Constitutional guarantee
of a progressive taxation
 Philippines has a dominantly
regressive tax system
 Due to the prevalence
of business taxes
Tax Collection Systems
Withholding system on income tax
o A system of tax collection wherein
payors are required to deduct the full
tax on certain income payments
o is intended for the collection of taxes
from income with high risk of non-
compliance
 Similarities
o In both cases the income payor
withholds a fraction of the income and
remits the same to the government
o Collecting at the moment that cash is
available
o Both serve to minimize cash flow
problems to the taxpayer
o Minimize cash collection problems to
the government
 Differences

 The payor of the income withholds or deducts FWT CWT

the tax on the income Income tax
Full Only a portion
o Before releasing the same to the withheld
payee and remits the same to the Certain passive
Coverage of Certain passive
government and active
Withholding income
o The following withholding taxes income
collected under this system: Income payor
for the CWT
 Creditable withholding tax Who remits
Income payor and the
o Intended to support the self- the actual tax
taxpayer for
assessment method the balance
 To lessen the burden of lump- Necessity of
sum tax payment income tax
 Also provides for a possible Not required Required
return for
third-party check for the non- taxpayer
compliant taxpayers
o Withholding tax on compensation
Withholding system on business tax
 Estimated tax required by the
government to be withheld by  When the national government agencies and
employers instrumentalities
 Against the o Including government owned and
compensation income controlled corporations
of their employees  Purchase goods or services
o Expanded Withholding Tax from private suppliers
 Estimated tax required by the  Law requires
government to be withheld withholding of the
 On certain income relevant business tax
payments
o Made by Voluntary compliance system
taxpayers  Under this collection system, the taxpayer
engaged in himself
business o Determines his income
 Final withholding tax o Reports the same through income tax
returns
 o Pays the tax to the government
 Also referred to as
o Self-assessment method
 The tax due determined under this system will
be reduced by:
o Withholding tax on compensation
withheld by employers
o Expanded Withholding taxes withheld
by suppliers of goods or services
 Taxpayer shall pay to the government any tax
balance
o After such credit or claim refund or
tax credit for excessive tax withheld

Assessment or Enforcement System

 Under this collection system

o The government identifies non-
compliant taxpayers
o Assesses tax dues including penalties
o Demands for taxpayer’s voluntary
compliance
o Enforces collection by coercive means
 Such as
 Summary proceeding
 Judicial proceeding
o 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)

 Fiscal Adequacy
 Theoretical Justice
 Administrative Feasibility

Fiscal Adequacy

 Requires that the sources of government

funds must be sufficient
o To cover government costs
 Government must not incur a deficit
 Budget deficit
o Paralyzes the government’s ability to
deliver the essential public service to
the people
 Taxes should increase as government
spending increase