TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION

GENERAL PRINCIPLES OF TAXATION

Taxation may be defined as a state power, legislative process and a mode of government cost distribution.
The exercise of the sovereign power to raise revenues for the expenses of the government.
1. As a state power – taxation is an inherent power of the State to enforce a proportional contribution from its subjects for public
purpose.
2. As a legislative process – taxation is a process of levying taxes by the legislature of the State to enforce a proportional
contribution from its subjects for public purpose.
3. As a mode of cost distribution – taxation is a mode by which the State allocates its costs or burden to its subjects who are
benefited by its spending

PURPOSES OF TAXATION
1. Primary purpose: Revenue or Fiscal purpose – a tax is imposed for ABSOLUTELY for general purpose.
2. Secondary purpose:
a. Regulatory/Sumptuary purpose:
i. To implement the police power of the state to promote general welfare.
ii. To regulate conduct of businesses or professions.
b. Compensatory purpose:
i. To reduce excessive inequalities of wealth
ii. To maintain high level of employment
iii. To control inflation

THEORIES OF TAXATION
Every government provides a vast array of public services including defense, public order and safety, health, education and social
protection among others. Government’s need for funding.
1. Necessity theory – the existence of the government is a necessity. The government cannot continue to perform of serving and
protecting its people without means to pay its expenses. For this reason, the state has the right to compel all its citizens and
property within its limits to contribute (compulsory). This is the reason why that taxation is a state power.
2. Lifeblood doctrine – taxes are the lifeblood of the government without which it can neither exist nor endure.

THEORIES OF COST ALLOCATION

Taxation is a mode of allocating government costs or burden to the people distributing the costs or burden, the government regards the
following general considerations in the exercise of its taxation power:
1. Benefit received theory– presupposes that the more benefit one receives from the government, the more taxes he should pay.
2. Ability to pay theory – presupposes that taxation should also consider the taxpayer’s ability to pay. Taxpayers should be
required to contribute based on their relative capacity to sacrifice for the support of the government.
Aspects of the ability to pay theory:
a. Vertical equity – extent of one’s ability to pay is directly proportional to the level of his tax base. It is based on gross
concept.
b. Horizontal equity – requires consideration of the particular circumstance of the taxpayer. It is based on net concept.

PRINCIPLES/CANONS OF A SOUND TAX SYSTEM

1. Fiscal adequacy – sources of government revenue must be sufficient to meet government expenditures and other public needs.
2. Administrative Feasibility – tax laws must be capable of convenient, just and effective administration – free from confusion
and uncertainty
3. Theoretical justice – a good tax system must be based on the taxpayer’s ability to pay. This suggests that taxation must be
progressive conformably with the constitutional mandate that congress shall evolve a progressive system of taxation.

INHERENT POWERS OF THE STATE

These rights are natural, inseparable and inherent to every government. No government can sustain or effectively operate without
these powers. Hence, the exercise of these powers by the government is presumed understood and acknowledged by the people from
the very moment they established their government. These powers are naturally exercisable by the government even in the absence of
an express grant of power in the Constitution.

Taxation power Police power Eminent domain

Definition Raise revenue, through the Enact laws in relation to persons and Acquire private property for public
enactment of laws that impose property to promote public health, purpose upon payment of just
charges upon persons, property and public morals, public safety and compensation.
activity under its jurisdiction, to general welfare of the people.
defray the expenses of the
government.
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
Taxation power - Subject to inherent and constitutional limitations, the power of taxation is regarded as supreme, plenary,
unlimited, and comprehensive. As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or
restrictions, the courts have no concern with the wisdom or policy of the exaction, the political or other collateral motives behind it,
the amount to be raised, or the persons, property, or other privileges to be taxed.

Police power - It involves the power to regulate both liberty and property for the promotion of the public good.

Power of eminent domain - The Constitution limits the exercise of this power by providing that: “Private property shall not be
taken for public use without just compensation.” (Art. III, Sec. 9, 1987 Philippine Constitution.)

Point of difference
1. Exercising authority Government Government Government and private
utilities
2. Purpose For the support of the To protect the general welfare For public use.
government. of the people thru regulations.

3. Persons affected Community or class of Community or class of Owner of the property

individuals individuals
4. Amount of imposition Unlimited Limited No amount imposed.

5. Importance Most important Most superior Important

6. Relationship with the Inferior to the “non- Superior to the ““non- Superior to the ““non-
Constitution impairment clause” of the impairment clause” of the impairment clause” of the
Constitution. Constitution Constitution
7. Limitation Constitutional and Inherent Public interest and due Public purpose and just
limitations process compensation

Similarities of the three powers of the State

1. They are all necessary attributes of the sovereignty.
2. They are all inherent to the State.
3. They are all legislative in nature.
4. They are all ways in which the State interferes with private rights and properties.
5. They all exist all ways independently of the Constitution and are exercisable by the government even without Constitutional
grant. However, the Constitution may impose conditions or limits for their exercise.
6. They all presuppose an equivalent form of compensation received by the persons affected by the exercise of the power.
7. The exercise of these powers by the local government units may be limited by the national legislature.

SCOPE OF TAXATION POWER

1. Comprehensive – it covers persons, business, activities, professions, rights and privileges.
2. Unlimited – taxation power is one so unlimited in force and so searching in extent that the courts scarcely venture to declare that
it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it.
3. Plenary – as it is complete (this is further demonstrated on different of collection)
4. Supreme – insofar as the selection of the subject of taxation is concerned.

ASPECTS/STAGES/COVERAGE OF TAXATION
1. Levying – also known as imposition of the tax which is legislative act or function. It is called impact of taxation. Also referred to
as the legislative act in taxation. In the Philippines, the taxing power is exercised by Congress. Congress is composed of two
bodies:
a. The House of the Representatives, and
b. The Senate
2. Assessment – determination of the correct amount of tax. The process of determining the correct amount of tax due.
3. Collection and payment – the national agency charged with the function of collecting internal revenue taxes is the Bureau of
Internal Revenue. The act of compliance with the tax law by the taxpayer

Assessment and Collection – this stage is referred to as incidence of taxation or the administrative act of taxation.

LIMITATIONS OF THE TAXATION POWER

Inherent limitations (PINET) - These are restrictions arising from the very nature of the power to tax itself.
1. The tax must be for public purpose.
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
2. International comity
3. Non-delegation of the taxing power
4. Exemption from taxation of the government agencies performing governmental functions
5. The levy must apply within territorial limits for the exercise of effective tax jurisdiction.
Subject Situs
1. Business tax Place where the business is conducted.
2. Income tax on services Service fees are taxable where they are rendered.
3. Income tax on sale of goods Gain on sale is taxable in the place of sale
4. Real property tax Location of the property.
5. Poll tax on persons/Personal tax Residence of the person
6. Tangible personal property Where it is physically located or permanently kept
7. Intangible personal property Where it will be exercised or domicile of the owner (movables follows the person)

6. Double Taxation
Direct double taxation – Where:
(1) the same subject is taxed twice;
(2) by the same taxing authority;
(3) within the same jurisdiction;
(4) during the same taxing period; and
(5) covering the same kind or character of tax (Villanueva v. City of Iloilo, L-26521).

There is no constitutional prohibition against double taxation in the Philippines (Villanueva v. City of Iloilo, L-26521,
December 28, 1968), though it is not favoured.

Indirect double taxation, which lacks one or more of the elements of direct double taxation, is also permissible.

Constitutional limitations
1. Due process of law
No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the
equal protection of the laws. (Art. III, Sec. 1.)
Aspects of Due process:
a. Substantive due process – tax must be imposed only for public purpose, collected only under authority of a valid law and
only by the taxing power having jurisdiction. Assessment without a legal basis violates the requirement of due process.
b. Procedural due process – there should be no arbitrariness in assessment and collection of taxes, and the government shall
observe the taxpayer’s right to notice and hearing. The law established procedures which must be adhered to in making
assessment and in enforcing collections.
2. Equal protection of the law
Constitutional provision – no person shall be deprived of life, liberty or property without due process of law, nor shall any person
denied equal protection of the laws.” (Art III, Sec 1). The same means and methods be applied impartially to all the members of
each class.
3. Uniformity rule
Taxation rule: shall be uniform and equitable. Persons or properties falling under the same class should be taxed the same kind
and rate of tax. Taxpayers under dissimilar circumstances should not be taxed the same. Taxpayers should be classified according
to commonality in attributes and the tax classification to be adopted should be based on substantial distinction.
4. Progressive system of taxation
Tax rates increase as the tax base increases. The Constitution favors progressive tax as it is consistent with the taxpayer’s ability
to pay. It aids an equitable distribution of wealth to society by taxing the rich more than the poor.
5. Non-imprisonment for non-payment of debt or poll tax
As a policy, no one shall be imprisoned because of his poverty, and no one shall be imprisoned for mere inability to pay debt.
Constitutional guarantee applies only when the debt is acquired by the debt in good faith.
Taxes Debt
Arises from Law Private contracts
Non-payment of it compromises Public interest Private interest
Note: Non-payment of tax is similar to crime. Constitutional guarantee on non–imprisonment for non-payment of debt does
not extend to non-payment of tax except poll tax.
Poll, personal, community or residency tax
Poll tax has two components:
a. Basic community tax – covered by constitutional guarantee of non-imprisonment for non-payment of poll tax.
b. Additional community tax – non-payment of this is an act of tax evasion punishable by imprisonment.
6. Non-impairment of obligation and contract
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
The State should set an example of good faith among its constituents. It should not set aside its obligation from contracts by the
exercise of its taxation power. Tax exemptions granted under contract should be honored and should not be cancelled by a
unilateral government action.
7. Free worship rule
The Philippine government adopts free exercise of religion and does not subject its exercise to taxation.
o Properties and revenues of religious institutions such as tithes and offerings – NOT TAXABLE
o Income from properties or activities of religious institutions that are proprietary or commercial in nature – TAXABLE
8. Exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosques, land, buildings
and improvements from PROPERTY TAX.
The Constitutional exemption from property tax applies for properties actually, directly and exclusively (i.e., primarily) used for
charitable, religious and educational purposes. In the Philippine setting, doctrine of use is followed wherein only properties
actually devoted for religious, charitable or educational activities are exempt from real property tax.
9. Non-appropriation of public funds or property for the benefit of any church, sect, or system of religion
This is to highlight the separation of religion and the State. To support freedom of religion, the government should not favor
any particular system of religion by appropriating public funds or property in support thereof. Compensation to priest, imams, or
religious ministers working with the military, penal institutions, orphanages or leprosarium is NOT considered religious
appropriation.
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institution including grants,
endowments, donations or contributions for educational purposes.
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
Tax collections should be used only for public purpose.
13. Non-delegation of the power of taxation
Implementing administrative agencies such as Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) issues
revenue regulations, ruling orders or circulars to interpret and clarify the application of the law. They are not allowed to
introduce new legislations within their quasi-legislative authority.
14. Non-impairment of the jurisdiction of the Supreme Court to review tax cases
Notwithstanding the existence of the Court of Tax appeals, which is a special court, all cases involving taxes can be raised to
and be finally decided by the Supreme Court.
15. Appropriations, revenue, or tariff bills shall originate exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.
Laws that add income to the national treasury and those that allows spending therein must originate from the House of
Representatives while Senate may concur with amendments. The origination of a bill by Congress does not necessarily mean that
the House bill must become the final law. It was held constitutional by the Supreme Court when Senate changed the entire house
version of tax bill.
16. Each local government unit shall exercise the power to create its own sources of revenue and shall have a just share in the
national taxes.
This is a constitutional recognition of the local autonomy of local governments and an express delegation of the taxing power.

OTHER FUNDAMENTAL DOCTRINES IN TAXATION

1. Marshall Doctrine - “The power to tax involves the power to destroy.”
Application: imposition of excessive tax on cigarettes
2. Holme’s Doctrine - “Taxation power is not the power to destroy while the court sits.”
3. Prospectivity of tax laws
Tax laws are generally prospective in operation.
An ex post facto law or a law that retroacts is prohibited by the Constitution. Exceptionally, income tax laws may operate
retrospectively if so, intended by Congress under certain justifiable conditions.
4. Non-compensation or set-off
Taxes are not subject to automatic set-off or compensation because the taxpayer cannot delay payment of tax to wait for the
resolution of a lawsuit involving his pending claim against the government. Tax is not a debt; hence, it is not subject to set-off.
This rule is important to allow the government sufficient period to evaluate the validity of the claim.
5. Non-assignment of taxes
Tax obligations cannot be assigned or transferred to another entity by contract. Contracts executed by the taxpayer to such effect
shall not prejudice the right of the government to collect.
6. Imprescriptibility in taxation
Prescription is the lapsing of a right due to passage of time. Government’s right to collect taxes does not prescribe unless the law
itself provides for such prescription.
7. Doctrine of estoppel
Any misrepresentation made by one party toward another who relied therein good faith will be held true and bind against that
person who made the misrepresentation.
8. Judicial Non-interference
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Generally, courts are not allowed to issue injunction against the government pursuit to collect tax as this would unnecessarily
defer tax collection. This rule is anchored on the Lifeblood Doctrine.
9. Strict Construction of Tax Laws - “Taxation is the rule, exemption is the exception.” This doctrine is observed when tax laws
are vague.
a. Vague tax laws – construed against the government and in favor of taxpayers. It means there is no tax law. Obligation
arising from law is not presumed.
b. Vague exemption laws – construed against the taxpayer and in favor of the government. It means there is no exemption
law. The claim for exemption is construed strictly against the taxpayer in accordance with the lifeblood doctrine. He
who claims exemption from the common burden must justify his claim by the clearest grant of organic or statue law.

DOUBLE TAXATION
This occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same thing.
Elements:
1. Primary element: Same object
2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
Types:
1. Direct double taxation – this occurs when all the element of double taxation exists for both impositions. This is discouraged
because it is oppressive and burdensome to taxpayers.
2. Indirect double taxation – this occurs when at least one of the secondary elements of double taxation is not common for both
impositions.
How can double taxation be minimized?
a. Provision of tax exemption
b. Allowing foreign tax credit
c. Allowing reciprocal tax treatment
d. Entering into treaties or bilateral agreement

ESCAPES FROM TAXATION

These are the means available to the taxpayer to limit or even avoid the impact of taxation.
Categories:
1. Those that result to loss of government revenue
a. Tax evasion – tax dodging. Illegally reduce or avoid tax payment. Manipulation of outstanding tax liabilities.
b. Tax avoidance – tax minimization.
c. Tax exemption – tax holiday, immunity, privilege or freedom from being subject to tax which others are subject to. It may
be granted by the constitution, law or contract.
2. Those that do not result to loss of government revenue
a. Shifting – process of transferring tax burden to other taxpayers.
Forms of shifting:
 Forward shifting
 Backward shifting
 Onward shifting
b. Capitalization - this pertains to the adjustment of the value of an asset caused by changes in tax rates.
c. Transformation – the manufacturer absorbs the additional taxes imposed by the government, without passing it to the
buyers for fear of lost of his market. Instead, it increases quantity of production, thereby turning their units of production at
a lower cost resulting to the transformation of the tax into a gain through the medium of productions.
Tax amnesty
General pardon granted by the government for erring taxpayers to give them a chance to reform and enable them to have a
fresh start to be part of a society with a clean slate. It is an absolute forgiveness or waiver by the government on its right
to collect and is retrospective in application

Tax condonation
Forgiveness of tax obligation of a certain taxpayer under certain justifiable grounds. Also known as tax remission.

Tax exemption, tax refund, tax amnesty and tax condonation deprive government revenues hence these are construed
against the taxpayer and in favor of the government.

TAXES, TAX LAWS AND TAX ADMINISTRATION

TAXATION LAW – refers to any law that arises from the exercise of the taxation power of the State.
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
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 immunity from taxation.
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
Types of Administrative Issuances
a. Revenue Regulations
b. Revenue memorandum orders
c. Revenue memorandum rulings
d. Revenue memorandum circulars
e. Revenue bulletins
f. BIR rulings
6. Local Ordinances
7. Tax Treaties and conventions with foreign countries.
8. Revenue Regulations
Issued by: Secretary of Finance
Recommended by: Commissioner of Internal Revenue (CIR) that specify, prescribe, or define rules and regulations for the
effective enforcement of the provisions of the NIRC and related statutes. These are formal pronouncements intended to clarify
or explain the tax laws and carry into effect its general provisions by providing details of administration and procedure. It 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)

Issuances that provide, instructions, prescribe guidelines, 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)

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)

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 Bulletin (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 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 any time.

Generally Accepted Accounting Principles VS Tax Laws

 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
In the preparation and filing of tax returns, taxpayers are mandated to follow the tax law in cases of conflict with GAAP.

NATURE OF PHILIPPINE TAX LAWS

Civil and not political in nature. Our internal revenue laws are not penal in nature because they do not define crime. Their penalty
provisions are merely intended to secure taxpayers’ compliance.

TAX – an enforced proportional contribution levied by the lawmaking body of the State to raise revenue for public purpose.

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 who bears the burden.
1. Direct tax – tax demanded from persons who are intended or bound by law to pay the tax.
2. Indirect – tax which the taxpayer can shift to another.
D. As to determination of amount
1. Specific – tax imposed on a physical unit of measurement as by head or number, weight, or length or volume.
2. Ad valorem – tax of a fixed proportion of the value of property; needs an independent appraiser to determine its value.
E. As to rate
1. Proportional tax – tax based on fixed percentage of the amount of property, income or other basis to be taxed
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 the poor.
3. Regressive tax – tax rate decreases as the tax base increases.
4. Mixed tax – combination of the above-mentioned types of tax
F. As to imposing authority
1. National tax – tax imposed by the national government.
Examples:
a. Income tax – tax in 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 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:
a. Real property tax
b. Professional tax
c. Business taxes, fees and charges
d. Community tax
e. Tax on banks and other financial institution

DISTINCTION OF TAXES WITH SIMILAR ITEMS

 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
TAX REVENUE
-amount imposed by the government for public purposes -all income collections of the government which includes taxes,
-amount imposed tariff, licenses, toll, penalties and others.
-amount collected
LICENSE FEE
-arises from taxation power and is imposed upon any object - arises from police power
such as persons, properties or privileges to raise revenue. - imposed to regulate the exercise of a privilege such as
-imposed after the commencement of a business or profession commencement of a business or a profession. - imposed before
(post-activity imposition) the commencement of a business or profession (pre-activity
imposition)
TOLL
-levy of a government, hence, demand of sovereignty. -a charge for the use of other’s property hence a demand of
-as to amounts, it depends upon the needs of the government. ownership.
- as to who can impose, only the government -as to amount, it depends upon the value of the property leased
-as to who can impose, both the government and private entities.
DEBT
-arises from law -arises from private contracts
-non-payment of it leads to imprisonment -non-payment of it does not lead to imprisonment
-cannot be set-off -can be subject to set-off
-generally payable in money -can be paid in kind
-it draws interest only when the taxpayer is delinquent -it draws interest when it is so stipulated by the contracting
parties or when the debtor incurs legal delay

SPECIAL ASSESSMENT
-amount imposed upon persons, properties or privileges. -levied by the government on lands adjacent to a public
-it is levied without expectation of a direct proximate benefit improvement.
-imposed on land and is intended to compensate the government
for a part of the cost improvement
-basis: The benefit in terms of the appreciation in land value
caused by the public improvement.
-it attaches to the land. It will not become a personal obligation
of the landowner. Therefore, non-payment of it will not result to
imprisonment of the owner.
TARIFF
-broader than tariff -amount imposed on imported or exported commodities
-amount imposed upon persons, properties or privileges.
PENALTY
-amount imposed for the support of the government. -amount imposed to discourage an act
-only imposed by the government -it may be imposed by both the government and private
-it only arises from law individuals
-arises from law or contract

TAX SYSTEM – refers to the methods or schemes of imposing, assessing, and collecting taxes. It includes all the 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. The national tax system
2. The local tax system

Types of Tax Systems according to impositions

1. Progressive – employed in the taxation of income of individuals.
2. Proportional – employed in taxation of corporate income and business, and transfers of properties by individuals
3. Regressive – not employed in the Philippines
Types of tax System According to Impact
1. Progressive system
 It 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
 Emphasizes indirect taxes. Indirect taxes are shifted by businesses to customers; hence, the impact of taxation rest
upon the bottom end of the society. In effect, a regressive tax system is anti-poor.
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 It is widely believed that despite the Constitutional guarantee of a progressive taxation, the Philippines has
dominantly regressive tax system due to the prevalence of business taxes.

TAX COLLECTION SYSTEMS

A. Withholding system on income tax – the payor of the income withholds or deducts the tax on the income before releasing the
same to the payee (employee/recipient) 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 taxpayer.

2. Final withholding tax – a system of tax collection wherein payors are required to deduct the full tax on certain income
payment.

Similarities of final tax and creditable withholding tax

a. In both cases, the 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 payor for the CWT and the
taxpayer for the balance
Necessity of income tax return for Not required Required
taxpayer

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 (i.e VAT or percentage tax).
C. Voluntary compliance 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.”
D. Assessment or enforcement system – the government identifies non-compliant taxpayers, assess 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.

TAX ADMINISTRATION
It 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 and administration of the Department of Finance.
Chief officials of the BIR
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 adjustment 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.
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
POWERS OF THE COMMISSIONER OF INTERNAL 8. To prescribe real property values
REVENUE The CIR is authorized to divide the Philippines into
1. To interpret the provisions of the NIRC, subject to zones and prescribe real property values after
review by the Secretary of Finance. consultation with competent appraisers. The values
2. To decide tax cases, subject to the exclusive appellate prescribed are referred to as zonal value.
jurisdiction of the Court of Tax appeals, such as: For purposes of internal revenue taxes, fair value of
a. Disputed assessments real property shall mean whichever is higher of:
b. Refunds of internal revenue taxes, fees, or other a. Zonal Value prescribed by the CIR
charges b. Fair market value as shown in the schedule of
c. Penalties imposed market values of the Provincial and City
d. Other NIRC and special law matters assessor’s Office
administered by the BIR. 9. To compromise tax liabilities of taxpayers
3. To obtain information and to summon, examine and 10. To inquire into bank deposits, only under the
take testimony of persons to effect tax collection following instances:
Purpose: For the CIR to ascertain: a. Determination of the gross estate of a decedent
a. The correctness of any tax return or in making a b. To substantiate the taxpayer’s claim of financial
return when none has been made by the taxpayer incapacity to pay tax in an application for tax
b. The tax liability of any person for any internal compromise.
revenue tax or in correcting any such liability In cases of financial incapacity, inquiry can proceed
c. Tax compliance of the taxpayer only if the taxpayer waives his privilege under the
Authorized acts of the Commissioner: Bank Deposit Secrecy Act.
a. To examine any book, paper, record or other data 11. To accredit and register tax agents
relevant to such inquiry The denial by the CIR of application for accreditation
b. To obtain on a regular basis any information is appealable to the Department of Finance. The
from any person other than the person whose failure of the Secretary of Finance to act on the
internal revenue tax liability is subject to audit appeal within 60 days is deemed approved. To refund
c. To summon the person liable for tax or required or credit internal revenue taxes
to file a return, his employees, or any person 12. To abate or cancel tax liabilities in certain areas
having possession and custody of his books of 13. To prescribe additional procedures or documentary
accounts and accounting records to produce such requirements
books, papers, records or other data and to give 14. To delegate his powers to any subordinate officer
testimony with a rank equivalent to a division chief of an office
d. To take testimony of the person concerned, under
oath, as may be relevant or material to the Non-delegated power of the CIR
inquiry 1. The power to recommend the promulgation of rules
e. To cause revenue officers and employees to and regulations to the Secretary of Finance.
make canvass of any revenue district 2. The power to issue rulings of first impression or to
4. To make assessment and prescribe additional reverse, revoke or modify any existing rulings of the
requirement for tax administration and enforcement Bureau.
5. To examine tax returns and determine tax due thereon 3. The power to compromise or abate any tax liability.
6. To prescribe presumptive gross sales and receipts for Except:
a taxpayer when: The Regional Evaluation Boards may compromise
a. The taxpayer failed to issue receipts; or tax liabilities under the following:
b. The CIR believes that the books or other records a. Assessments are issued by the regional offices
of the taxpayer do not correctly reflect the involving basic deficiency tax of P500,000 or
declaration in the return. less, and
The presumptive gross sales or receipt shall be b. Minor criminal violations discovered by regional
derived from the performance of similar business and district officials.
under similar circumstances adjusted for other Composition of the Regional evaluation Board
relevant information. a. Regional Director – chairman
7. To terminate tax period when the taxpayer is: b. Assistant Regional director
a. Retiring from business c. Heads of the Legal, Assessment and
b. Intending to leave the Philippines Collection Division
c. Intending to remove, hide or conceal his property d. Revenue District Officer having jurisdiction
d. Intending to perform any act tending to obstruct over the taxpayer.
the proceedings for the collection of the tax or 4. The power to assign and reassign internal revenue
render the same ineffective. officers to establishments where articles subject to
The termination of the taxable period shall be excise taxes are produce or kept.
communicated through a notice to the taxpayer
together with a request for immediate payment. Taxes Rules in assignments of revenue officers to other duties
shall be due and payable immediately
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION
1. Revenue officers assigned to an establishment where Automatic classification of taxpayers as large taxpayers
excisable articles are kept shall in no case stay there 1. All branches of taxpayers under the Large Taxpayer’s
for more than 2 years. Service
2. Revenue officers assigned to performed assessment 2. Subsidiaries, affiliates and entities of conglomerates
and collection function shall not remain in the same or group of companies of large taxpayer
assignment for more than 3 years. 3. Surviving company in case of merger or
3. Assignment of internal revenue officers and consolidation of a large taxpayer
employees of the Bureau to special duties shall not 4. A corporation that absorbs the operation or business
exceed 1 year. in case of spin-off of any large taxpayer
5. Corporation with an authorized capitalization of at
Agents and Deputies for Collection of National Internal least P300,000,000 registered with SEC.
Revenue taxes 6. Multinational enterprises with an authorized
1. The Commissioner of Customs and his subordinated capitalization or assigned capital of at least
with respect to collection of national internal revenue P300,000,000
taxes on imported goods. 7. Publicly listed corporation
2. The head of appropriate government offices and his 8. Universal, commercial and foreign banks (the regular
subordinates with respect to the collection of energy business unit and foreign currency deposit unit shall
tax. be considered one taxpayer for purposes of
3. Banks duly accredited by the Commissioner with classifying them as large taxpayer.
respect to receipts payments of internal revenue taxes 9. Corporate taxpayers with at least P100,000,000
authorized to be made thru banks. These are referred authorized capital in banking, insurance,
to as authorized government depositary banks. telecommunication, utilities, petroleum, tobacco and
(AGDB) alcohol industries
10. Corporate taxpayers engaged in the production of
Classification of individual taxpayers as to source of metallic minerals
taxable income
1. Resident citizen
2. Nonresident citizen
3. Resident alien
4. Non-resident alien
a. Engaged in trade or business
b. Not engaged in trade or business
c. Alien individuals employed by an Offshore
Gaming Licensee (OGL) and Service Providers
(under paragraph of Tax Code [Sec. 25 (G)] as
amended by RA 11590

Classification of taxpayers for purposes of Responsive Tax

Administration under Section 21(b) of the Tax Code as
amended by RA 11976 or Ease of Paying Taxes (EOPTA)
Group** Gross sales***
Micro Less than P3,000,000
Small P3,000,000 to less than P20,000,000
Medium P20,000,000 to less than P1,000,000,000
Large P1,000,000,000 and above

**These categories shall apply to all types of taxpayers

(individuals, estates, trusts, corporations, partnership,
joint ventures, etc.)

***Gross sales under these categories shall refer to:

 Total sales revenue, net of VAT, if applicable during
the taxable year, without any deductions; and
 Business income, excluding compensation income
earned under employer-employee relationship,
passive income under Sections 24, 25, 27 and 28 and
income excluded under Section 32(B), all of the Tax
Code, as amended. Business income shall include
income from the conduct of trade or the exercise of
profession.
 TAX 01: FUNDAMENTAL PRINCIPLES OF TAXATION AND ADMINISTRATION

References:
Income Taxation 2019 edition by Rex B. Banggawan, CPA, MBA
RA 11976 (EOPT)
RA 11534 Corporate Recovery and Tax Incentives for Enterprises Act or “CREATE Law”