INSTITUTO NG PANGANGALAKAL AT PAGTUTUOS

Subject Code: ACT25

Subject Title: Income Taxation
No. of Units: 3
MODULE 2
TAXES, LAWS, SYSTEMS AND ADMINISTRATION
I. PRE-TEST / ACTIVITY
1. Taxation is the primary source of government revenue. Hence all government funds come from taxes.
a. True
b. False

2. Among the executive officials of the government, only the CIR has the power to interpret the provisions of NIRC
and the other tax laws.
a. True
b. False

II. CONTENT
A. TAXES
Tax is a burden, charge, exaction, imposition or contribution assessed in accordance with some reasonable rule of
apportionment by authority of the sovereign state upon the persons or property within its jurisdiction, to provide public
revenue for the support of the government, the administration of the law, or the payment of public expenses. [71 AM
JUR 2ND 343-346]

Essential elements of tax

1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property, or the exercise of a right or privilege (subjects or objects of taxation)
5. It is levied by the law-making body of the state
6. It is levied for public purpose

Revenue
Revenue refers to all funds or income derived by the government, whether from tax or any other source. It may be
derived from the following sources:
1. Taxes as internal revenues and customs duties
2. Grants received from another government
3. Donations from non-government sources
4. Loans from private entities or another government entity
5. Commercial revenues such as those received by government-owned & controlled corp.
6. Administrative revenues such as fines, penalties, and forfeitures

Classification of taxes
1. As to scope or authority to impose
a. National – imposed by the national government. E.g. income tax, estate tax, donor’s tax, value-added tax,
other percentage taxes, excise taxes, documentary stamp tax, and custom duties.
b. Municipal or local – imposed by the municipal corporations or local governments. E.g. real property tax,
professional tax, community tax.

2. As to subject matter or object

a. Personal, poll, or capitation tax – fixed amount imposed on individuals residing within specified territory
without regard to their property, occupation or business. E.g. community tax (cedula).
b. Property tax – imposed on property, real or personal in proportion to its value or other reasonable method
of apportionment. E.g. real property tax.
c. Excise tax – imposed upon performance of an act, the enjoyment of a privilege or the engaging in an
occupation, profession or business. E.g. income tax, VAT, estate tax, donor’s tax.

3. As to who bears the burden or incidence

a. Direct – the tax is imposed on the person who also bears the burden thereof. E.g. income tax, estate tax,
donor’s tax, and community tax.
b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another. E.g. VAT, percentage tax,
and customs duties.

1
 4. As to determination of amount
a. Specific – tax imposed and based on a physical unit of measurement, as by head, number, weight, length
or volume. E.g. excise tax on cigarettes and liquors.
b. Ad Valorem – tax of a fixed proportion of the value of property with respect to which the tax is assessed.
E.g. real property tax and excise tax on cars.

5. As to purpose
a. General, fiscal or revenue – imposed for the general purpose of supporting the government. E.g. income
tax, estate tax, donor’s tax, value-added tax, other percentage taxes.
b. Special, regulatory or sumptuary – imposed for a special purpose, to achieve some social or economic
objectives. E.g. tariffs or customs duties on imported goods intended to protect local industries.

6. As to graduation or rate
a. Proportional – based on a fixed percentage of the amount of the property, income or other basis to be
taxed. E.g. real property tax, VAT, percentage tax, estate tax, donor’s tax.
b. Progressive or graduated – tax rate increases as the tax base or bracket increases. E.g. income tax on
individual taxpayers.
c. Regressive – tax rate decreases as the tax base increases.

Tax as distinguished from other forms of exactions

Tax Toll
Basis Demand of sovereignty Demand of proprietorship
Amount Generally, the amount is unlimited Amount is limited to the cost and
maintenance of public improvement
Purpose For the support of the government For the use of another’s property
Imposing May be imposed by the state only May be imposed by private individuals or
Authority entities

Tax License Fee

Basis Collected under the power of taxation Collected under the police power
Purpose Imposed to raise revenue For regulation and control
Amount Generally, the amount is unlimited Limited to the necessary expenses of
regulation and control
Effect of Non- Non-payment does not make the business Non-payment makes the business illegal
payment illegal

Tax Tariff/Customs Duty

Coverage More comprehensive than customs duty Only a kind of tax; therefore limited
coverage
Object Person, property and privilege Goods imported or exported

Tax Debt
Basis Obligation created by law Obligation based on contract
Assignability Not assignable Assignable
Set-off Not subject to set-off Subject of set-off
Mode of payment Generally payable in money Payable in kind or in money
Effect of non- May result in imprisonment No imprisonment (except when debt arises
payment from crime)

Tax Special Assessment

Purpose For the support of the government Contribution to the cost of public
improvement
Subject Imposed on person, property and privilege Levied only on land
Imposing May be imposed by national or local May only be imposed by the local
Authority government government
Scope Regular exaction Exceptional as to time and locality

B. TAX LAWS
Tax law any law that provides for the assessment and collection of taxes for the support of the government and other
public purposes.

Sources of tax laws

1. Constitution
2. Statutes or laws (National Internal Revenue Code - RA 8424 NIRC / RA 10963 TRAIN / RA 11494 BAYANIHA
II / RA 11534 CREATE, Tariff and Customs Code - RA 1937 TCC, Local Government Code - RA 7160 LGC)
3. Tax treaties and international agreements
4. Presidential decrees
5. Decisions of the Supreme Court and the Court of Tax Appeals
6. Revenue rules and regulations and administrative rulings and opinions
7. Local tax ordinances/ City or municipal tax codes

2
 Nature of Philippine tax laws
Philippine tax laws are civil and not political in nature. They remain effective even during periods of enemy occupation.
They are laws of the occupied territory and not by the occupying enemy. Tax payments made during occupations of
foreign enemies are valid.

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.

Construction and interpretation of tax laws

General rule: Tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.
(MCIAA v. Marcos, G.R. No. 120082 September 11, 1996) The imposition of a tax cannot be presumed.

Exemption: Unless a statute imposes a tax clearly, expressly, and unambiguously, what applies is the equally well-settled
rule that the imposition of a tax cannot be presumed. Where there is doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer. This is because taxes are burdens on the taxpayer and should not be unduly
imposed or presumed beyond what the statutes expressly and clearly import. (CIR V. The Philippine American Accident
Insurance, Inc., 453 SCRA 668, G.R. No. 141658 March 18, 2005)

The rule that, in case of doubt of legislative intent, the doubt must be liberally construed in favor of taxpayer does not
extend to cases involving the issue of the validity of the tax law itself which, in every case, is presumed valid.

Tax exemption and exclusion

General rule: Statutes granting tax exemptions are construed in strictissimi juris against the taxpayers and liberally in
favor of the taxing authority. (MCIAA V. Marcos, GR No. 120082 September 11, 1996)

Tax refunds are in the nature of tax exemptions which are construed ín strictissimi juris against the taxpayer and liberally
in favor of the government. (Kepco Philippines Corporation v. CIR, G.R. No. 179961, January 31, 2011)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes
all others as expressed in the familiar maxim expressio unius est exclusio alterius. Thus, the omission or removal of
PAGCOR from exemption from the payment of corporate income tax is to require it to pay corporate income tax.
(PAGCOR V. BIR GR. No. 1 72087, March 15, 201)

Administrative Issuances (Revenue Issuances)

The Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful rules and regulations
for the effective enforcement of the provisions of the Tax Code (Section 244, Tax Code of 1997).

Administrative issuances which may be relied upon in interpreting the provisions of the Tax Code, which are signed by
the Secretary of Finance, or the Commissioner of Internal Revenue (CIR), or his duly authorized representative, come
in the form of:

1. Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue 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.
These are formal pronouncements intended to clarify or explain the 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.
2. Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions; prescribe
guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the
implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations,
except auditing.
3. Revenue Memorandum Circular (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.
4. Revenue Administrative Orders (RAOs) are issuances that cover subject matters dealing strictly with
the permanent administrative set-up of the Bureau, more specifically, the organizational structure, statements of
functions and/or responsibilities of BIR offices, definitions and delegations of authority, staffing and personnel
requirements and standards of performance.

5. Revenue Delegation of Authority Orders (RDAOs) refer to functions delegated by the Commissioner to
revenue officials in accordance with law.

C. TAX SYSTEM
The 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: the national
tax system and the local tax system.

3
 Principles of a sound tax system
1. Fiscal adequacy – revenue raised must be sufficient to meet government/public expenditures and other public
needs.
2. Theoretical justice – must take into consideration the taxpayer’s ability to pay. Art. VI, Sec. 28(1) 1987
Constitution mandates that the rule on taxation must be uniform and equitable ant that the state must evolve a
progressive system of taxation.
3. Administrative feasibility - the tax system should be capable of being effectively administered by the
government and enforced with the least inconvenience to the taxpayer.
Tax collection systems
1. 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:
a. Creditable withholding tax
1) 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.
2) Expanded withholding tax - an estimated tax required by the government to be deducted on
certain income payments made by taxpayers engaged in business.
The creditable withholding tax is intended to support the self-assessment method to lessen the burden of
lump sum tax payment of taxpayer and also provides for a possible third-party check for the BIR of non-
compliant taxpayers.
b. Final withholding tax - a system of tax collection wherein payors are required to deduct the full tax on
certain income payments.
The final withholding tax is intended for the collection of taxes from income with high risk of non-
compliance.
Differences between creditable withholding tax and final withholding tax
Creditable Withholding Tax Final Withholding Tax
(CWT) (FWT)
Income tax withheld Only a portion Full
Coverage of withholding Certain passive and active income Certain passive income
Who remits the actual tax Income payor for the CWT and Income payor
the taxpayer for the balance
Necessity of income tax Required Not required
return for taxpayer

2. 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).
3. 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.
4. 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.

D. 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.

Officials of the Bureau of Internal Revenue

1. One chief - Commissioner of Internal Revenue (CIR)
2. Four assistant chiefs - Deputy Commissioners, who lead following divisions:
a. Operations group
b. Legal Group
c. Information Systems Group
d. Resource Management Group

Powers and duties of the BIR

1. Assessment and collection of all national internal revenue taxes, fees, and charges;
2. Enforcement of all forfeitures, penalties, and fines;
3. Execution of judgments in all cases decided in its favor (by the CTA and regular courts);

4
 4. Give effect and administer the supervisory and police powers conferred to it by the NIRC and other laws; and
5. Recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement of the
provision of the NIRC.

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 make or amend a return for and in behalf of a taxpayer; or to disregard one filed by the taxpayer
6. To change a tax period
7. To compromise a tax liabilities of taxpayers
8. To conduct inventory surveillance
9. To prescribe presumptive gross sales or receipts
10. To prescribe real estate values. The CIR is authorized to divide the Philippines into zones or areas and determine
the fair market value of the real properties located in each zones or area
11. To accredit tax agents. Individuals or general professional partnerships who have been denied their accreditation
may appeal to the Secretary of Finance who shall act on the appeal within 60 days from the receipt of such appeal.
Failure by him to rule on the appeal within the prescribed period shall be deemed approval of the application for
accreditation.
12. To inquire into bank deposits under certain cases (e.g. A decedent to determine his gross estate; and any taxpayer
who has filed an application for compromise of his tax liability)
13. To prescribe additional procedures or documentary requirements
14. To delegate his power to any subordinate officer with rank equivalent to a division chief of an office
15. To refund or credit internal revenue taxes
16. To abate or cancel tax liabilities in certain cases
17. To examine tax returns and determine tax due thereon
18. To cause revenue officers and employees to make a canvass from time to time of any revenue district or region
concerning taxpayer

Powers of the CIR that cannot 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
Exception: Compromise by Regional Evaluation Boards under the following requisites:
a. Assessments are issued by the regional offices involving basic deficiency tax of ₱500,000 or less, and
b. Involves minor criminal violations as may be determined by rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the CIR, discovered by regional and district officials
4. The power to assign and reassign internal revenue officers to establishment where articles subject to excise tax
are produced or kept. Revenue officers assigned to any such establishments shall in no case stay in his assignment
for more than 2 years

Other agencies tasked with tax collections or tax incentives related functions
1. Bureau of Customs (BOC)
Aside from its regulatory functions, the bureau of Customs is tasked to administer collection of tariffs on imported
articles and collection of the Value Added Tax on importation. Together with the BIR, the BOC is under the
supervision of the Department of Finance.
The Bureau of Customs is headed by the Customs Commissioner and assisted by six (6) Deputy Commissioners,
one (1) Assistant Commissioner and seventeen (17) District Collectors who supervise the country’s principal
ports of entry.

2. Board of Investments (BOI)

The BOI is tasked to lead the promotion of investments in the Philippines by assisting Filipinos and foreign
investors to venture and prosper in desirable areas of economic activities. It supervises the grant of tax incentives
under the Omnibus Investment Code. The BOI is an attached agency of the Department of Trade and Industry
(DTI).
The BOI is composed of five full-time governors, excluding the DTI secretary as its chairman. The President of
the Philippines shall appoint a vice chairman of the board who shall act as the BOI's managing head.

3. Philippine Economic Zone Authority (PEZA)

The PEZA is created to promote investments in export-oriented manufacturing industries in the Philippines and,
among other myriads of functions, supervise the grant of both fiscal and non-fiscal incentives.
PEZA registered enterprises enjoy tax holidays for certain years, exemption from import and export taxes
including local taxes. The PEZA is also an attached agency of the DTI. The PEZA is headed by a director general
and is assisted by three deputy directors.

4. Local Government Tax Collecting Units

Provinces, municipalities, cities and barangays also imposed and collect various taxes to rationalize their fiscal
autonomy.

5
 Taxpayer classification for purposes of tax administration
For purposes of effective and efficient tax administration, taxpayers are classified into:
Group Gross Sales
1. Micro Less than ₱3 Million
2. Small ₱3 Million to less than ₱20 Million
3. Medium ₱20 Million to less than ₱1 Billion
4. Large ₱1 Billion and above
RA 11976 Ease of Paying Taxes ([EOPT) Act; RR 8-2024
For purposes of determining a taxpayer’s classification, RR No. 8-2024 defines gross sales as total sales revenue during
the taxable year, net of Value-Added Tax (VAT) and without any other deductions.

III. Activity
True or False. Write true if the statement is correct and false if otherwise.
1. Progressive tax is not imposed in the Philippines
2. The Constitution is a source of tax laws.
3. Donor’s tax is a direct tax.
4. Excise taxes on specific goods imposed under the NIRC are always specific.
5. Income tax is an ad valorem tax.
6. Real estate tax is a national tax.
7. In case of conflict, GAAP shall prevail over tax laws.
8. Taxes on distilled spirits, fermented liquors and the like are specific taxes.
9. The BIR functions under the supervision and control of the Bureau of Treasury.
10. License and fees is the proportional contribution by persons and property levied by
the lawmaking body of the State by virtue of its sovereign for the support of the
government and all public needs.

TAX-Chap 2-3 Question And Answer - TAX 1 INCOME TAXATION Chapter 2: SELF-TEST EXERCISES Discussion - Studocu

Taxation H01 - Fundamental Principles of Taxation - REO CPA REVIEW PRINCIPLES OF TAXATION REX B. - Studocu