Taxation Law

Taxation law refers to any law that arises from the exercise of the taxation power
of the State.

Types of taxation laws

1. Tax laws – these are laws that provide for the assessment and collection of
taxes.
Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tariff and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code

2. Tax exemption laws – these are laws that grant certain immunity from
taxation.
Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)
c. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act
Sources of Taxation Laws

1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuances
6. Local Ordinances
7. Tax Treaties and conventions with foreign
countries
8. Revenue Regulations
Types of Administrative Issuances

1. Revenue regulations
2. Revenue memorandum orders
3. Revenue memorandum rulings
4. Revenue memorandum circulars
5. Revenue bulletins
6. BIR rulings
Revenue Regulations are 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.

Revenue regulations are formal pronouncements intended to clarify or

explain the tax law and carry into effect its general provisions by providing
details of administration and procedure. Revenue regulation has the force
and 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) are issuances that provide

directives or instructions; prescribe guidelines; and outline the 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,
opinion 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) refer to 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 are official positions of the Bureau to queries raised by

taxpayers and other stakeholders relative to clarification and
interpretation of tax laws.

Rulings are merely advisory or a sort of information service to the

taxpayer such that none of them is binding except to the addressee and
may be reversed by the BIR at anytime.

Types of rulings
1. Value Added Tax (VAT) rulings
2. International Tax Affairs Division (ITAD) rulings
3. BIR rulings
4. Delegated Authority (DA) rulings
Generally Accepted Accounting Principles (GAAP) vs Tax Laws

Generally accepted accounting principles or GAAP are not laws, but are
more 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.

Tax laws including rules, regulations, and rulings prescribe the criteria
for tax reporting, a special form of financial reporting which is intended
to meet specific needs of tax authorities.

Taxpayers normally follow GAAP in recording transactions in their

books. However, in the preparation and filing of tax returns, taxpayers
are mandated to follow the tax law in cases of conflicts with GAAP.
Elements of a Valid Tax

1. Tax must be levied by the taxing power having

jurisdiction over the object of taxation.
2. Tax must not violate constitutional and inherent
limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.
Classification of Taxes

A. As to purpose
1. Fiscal or revenue tax – a tax imposed for general purpose
2. Regulatory – a tax imposed to regulate business, conduct,
acts or transactions
3. Sumptuary – a tax levied to achieve some social or
economic objectives

B. As to subject matter
1. Personal, poll or capitation – a tax on persons who are
residents of a particular territory
2. Property tax – a tax on properties, real or personal
3. Excise or privilege tax – a tax imposed upon the
performance of an act, enjoyment of a privilege or
engagement in an occupation
C. As to incidence
1. Direct tax – when both the impact and incidence of taxation
rest upon the same taxpayer, the tax is said to be direct. The
tax is collected from the person who is intended to pay the
same. The statutory taxpayer is the economic taxpayer.
2. 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.

D. As to amount
1. Specific tax – a tax of a fixed amount imposed on a per unit
basis such as per kilo, liter or meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the
value of the tax object.
E. As to rate
1. 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.
2. 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. It aids in
lessening the gap between the rich and the poor.
3. 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.
4. Mixed tax – this tax manifest tax rates which is a
combination of any of the above type of tax.
F. As to imposing authority
1. 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 taxes – 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 papers evidencing the acceptance, assignment, sale or
transfer of an obligation, right or property incident thereto
2. Local tax – tax imposed by the municipal or local government
Examples:
1. Real property tax
2. Professional tax
3. Business taxes, fees and charges
4. Community tax
5. Tax on banks and other financial institutions
Tax vs. Revenue

Tax refers to the amount imposed by the

government for public purpose. Revenues
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.
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 the
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 draws interest when it is so stipulated by the
contracting parties or when the debtor incurs a 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 the

appreciation in land value caused by the public improvement. On the
other hand, tax is levied without expectation of a direct proximate
benefit.

Unlike taxes, special assessment attaches to the land. It will not

become a personal obligation of the land owner. Therefore, the non-
payment of special assessment will not result to imprisonment of the
owner (unlike in non-payment of taxes).
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 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

2. Final withholding tax – a system of tax collection wherein

payors are required to deduct the full tax on certain income
payments.
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.

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 summary proceeding or judicial
proceedings when necessary.
Principles of a Sound Tax System

A. 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. Hence, taxes should increase in response to
increase in government spending.

B. Theoretical justice – suggests that tax laws should consider the taxpayers
ability to pay. It also suggests that the exercise of taxation should not be
oppressive, unjust, or confiscatory.

C. 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 of 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.

Chief Officials of the Bureau of Internal Revenue

1. 1 Commissioner
2. 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

1. Assessment and collection of taxes

2. Enforcement of all forfeitures, penalties and fines, and judgments
in all cases decided in its favor by the courts
3. Giving effect to, and administering the supervisory and police
powers conferred to it by the NIRC and other laws
4. Assignment of internal revenue officers and other employees to
other duties
5. Provision and distribution of forms, receipts, certificates, stamps,
etc. to proper officials
6. Issuance of receipts and clearances
7. 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
3. To obtain information and to summon, examine and take testimony of persons to effect tax collection
4. To make assessment and prescribe additional requirement for tax administration and enforcement
5. To examine tax returns and determine tax due thereon
6. To conduct inventory taking or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when the taxpayer failed to issue receipts
or the CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration
in the return
8. To terminate tax period
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits
12. To accredit and register tax agents
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 to a 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 the Secretary of Finance.
2. The power to issue rulings of first impression or to
reverse, revoke or modify any existing rulings of the
Bureau.
3. The power to compromise or abate any tax liability
4. The power to assign and reassign internal revenue
officers to establishments where articles subject to
excise tax are produced or kept.
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
Taxpayer Classification for Purposes of Tax
Administration

1. Large taxpayers – under the supervision of the

Large Taxpayer Service (LTS) of the BIR
National Office.
2. Non-large taxpayers – under the supervision of
the respective Revenue District Offices (RDO)
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 ₱200,000 per quarter for the preceding year
2. Excise Tax – at least ₱1,000,000 tax paid for the preceding year
3. Income Tax – at least ₱1,000,000 annual income tax paid for the
preceding year
4. Withholding Tax – at least ₱1,000,000 annual withholding tax payments
or remittances from all types of withholding taxes
5. Percentage Tax – at least ₱200,000 percentage tax or payable per quarter
for the preceding year
6. Documentary stamp tax – at least ₱1,000,000 aggregate amount per year

B. As to financial conditions and results of operations

1. Gross receipts or sales - ₱1,000,000,000 total annual gross sales or
receipts
2. Net worth - ₱300,000,000 total net worth at the close of each calendar or
fiscal year
3. Gross purchases - ₱800,000,000 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 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 ₱300,000,000
registered with the SEC
6. Multinational enterprise with an authorized capitalization or assigned
capital of at least ₱300,000,000
7. Publicly listed corporations
8. Universal, commercial, and foreign banks
9. Corporate taxpayers with at least ₱100,000,000 authorized capital in
banking, insurance, telecommunication, utilities, petroleum, tobacco
and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals