Chapter 2 - Taxes, Tax Laws and Tax Administration CHAPTER 2 TAXES, TAX LAWS, AND TAX ADMINISTRATION Chapter Overview and Objectives This Chapter discusses tax laws, taxes, and their distinction from similar items, and the administration of the tax system. After this chapter, readers are expected to comprehend and demonstrate knowledge on the following: SNavawNe oF The type of taxation laws Distinction among tax laws, revenue regulations, and rulings Tax, its elements, and classifications Distinction of tax from similar items Tax system and its types The principles of a sound tax system How tax is administered The powers of the Bureau of Internal Revenue (BIR) and the Commissioner of Internal Revenue (CIR) and the non-delegated powers of the CIR The criteria for selection of large taxpayers TAXATION LAW Taxation law refers to any law that arises from the exercise of the taxation power of the State. Types of taxation laws Ag Tax laws - These are laws that provide for the assessment and collection of taxes. Examples: a. The National Internal Revenue Code (NIRC) b. The Tariffand Customs Code c. The Local Tax Code d. The Real Property Tax Code Tax exemption laws - These are laws that grant certain immunity from taxation. Example: a, The Minimum Wage Law b. The Omnibus Investment Code of 1987 (E.0. 226) c. Barangay Micro-Business Enterprise (BMBE) Law d. Cooperative Development Act acChapter 2 - Taxes, Tax Laws and Tax Administration Sources of Taxation Laws . Constitution ‘Statutes and Presidential Decrees Judicial Decisions or case laws, Executive Orders and Batas Pambansa ‘Administrative Issuances Local Ordinances ‘Tax Treaties and Conventions with foreign countries 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. BIRrulings Revenue Regulations are issuances signed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (CIR) that specif, prescribe, or define rules and regulations for the effective enforcement of the provisions ofthe National Internal Revenue Code (NIRC) and related statutes. Revenue regulations are formal pronouncements intended to clarify or explain the tar 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 ofthe law; otherwise, it is voi. 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 ofthe Bureau in al areas of operations except auditing Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations ofthe CIR with respect to the provisions of the Tax Code and other tax laws as applied toa 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 dull issued RMRs; otherwise, the Rulings are null and void ab initio, Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions as wells amplifications of laws, rules, regulations, and precedents issued by the BIR and other agencies/offces, PNA Re we 36 Chapter 2 - Taxes, Tax Laws and Tax Administration, 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 aw 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 mere 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 conflict with GAAP. NATURE OF PHILIPPINE TAX LAWS Philippine tax laws are civil and not political in nature. They are 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 re valid. Our internal revenue laws are not penal in nature because they do not define Grime, Their penalty provisions are merely intended to secure taxpayers’ ‘compliance. 37Chapter 2 - Taxes, Tax Laws and Tax Administration TAK Taxis an enforced proportional contribution levied by the awmaking body of, State to raise revenue for public purpose, Elements ofa Valid Tax Tax must be levied by the taxing power having jurisdiction over the object taxation. Tax must not violate Constitutional and inherent limitations. ‘Tax must be uniform and equitable, ‘Tax must be for public purpose, Tax mustbe proportional in character 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. o; transactions 3. Sumptuary ~2 tax.evied to achieve some social or economic objectives 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 ofa privilege or engagement in an occupation © Astoincidence 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 taxis 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 isthe one who actually pays the tax. D. Astoamount 11. Specifc tax - a tax ofa fixed amount imposed on a per unit basis such 35 per kilo, liter or meter, etc. 38 Chapter 2 - Taxes, Tax Laws and Tax Administration 2 ‘Ad valorem ~ a tax ofa fixed proportion imposed upon the value of the tax object E, Astorate 1 1 Proportional tax - This isa flat or fixed rate tax. The use of proportional tax emphasizes equality as it subjects all taxpayers with the same rate ‘without regard to thelr ability to pay. Progressive or graduated tax - This isa 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. Itaids in lessening the gap between the rich and the poor. 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. ‘Mixed tax - This tax manifest tax rates which isa combination of any ofthe above types of tax. ‘As to imposing authority ‘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 Donor’ tax - tax on gratuitous transfer of properties by a living donor 4. Value Added Tax - consumption tax collected by VAT business taxpayers €. 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 also called excise tax. 8 Documentary stamp tax - a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale ortransfer of an obligation, right or property incident thereto. Local tax - tax imposed by the municipal or local government Examples: a, Real property tax b, Professional tax & Business taxes, fees, and charges 39Chapter 2 - Taxes, Tax Laws and Tax Administration 4d. Community tax €. Taxon banks and other financial institutions DISTINCTION OF TAXES WITH SIMILAR ITEMS Taxvs, Revenue Tax refers to the amount imposed by the government for public purpose. Reven,, refers to all income collections of the government which includes taxes, tar licenses, toll, penalties and others. The amount imposed is tax but the amoy, collected isrevenue. " ‘Taxvs. License fee ‘Tax has a broader subject than license, Tax emanates from taxation power and imposed upon any object such as persons, properties, or privileges to raiy revenue, License fee emanates from police power and is imposed to regulate the exercise a privilege such as the commencement ofa business or a profession. Taxes are imposed after the commencement of a business or profession wherex: license fee is imposed before engagement in those activities. In other words, taxi 4 post-activity imposition whereas license is apre-activity imposition. Tax vs. Toll ‘Tax isa levy of government; hence, itis a demand of sovereignty. Tol is a charg for the use of other's property; hence, it isa demand of ownership. ‘The amount of tax depends upon the needs ofthe government, but the amount e toll is dependent upon the value of the property eased. Both the government and private entities impose toll, but private entities cannot impose taxes. Tax vs. Debt ‘Tax arises from law while debt arses from private contracts. Non-payment of tt leads to imprisonment, but non-payment of debt does notlead to imprisonment. Debt can be subject to set-off but tax is not, Debt can be paid in kind (dacion et ‘pago) but taxis generally payable in money. ‘Tax draws interest only when the taxpayer is delinquent. Debt draws interes ‘when it isso stipulated by the contracting parties or when the debtor incurs # legal delay. chapter 2 - Taxes, Tax Laws and Tax Administration ‘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 fora part of the cost ofthe 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). Taxvs. Tariff ‘Tax is broader than tariff, Tax is an amount imposed upon persons, privilege, transactions, or properties. Tariffs the amount imposed on imported or exported commodities. ‘Taxys.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. ‘TAK 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. ‘Types of Tax Systems According to Imposition 1. Progressive ~ employed in the taxation of income of individuals, and certain local business taxes 2. Proportional - employed in taxation of corporate income and business 3._ Regressive — not employed in the Philippines ‘Types of Tax System According to Impact A. Progressive system A progressive tax system is one that 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 ric. a1Chepter 2 - Taxes, Tax Laws and Tax Ad 2. Regressive system A regressive tax system is one that emphasizes indirect taxes. Indirect tay, are shifted by businesses to consumers; hence, the impact of taxation res, upon the bottom end of the society. In effect, a regressive tax system is any, poor. Itis widely believed that despite the Constitutional guarantee of a progressi, taxation, the Philippines has a dominantly regressive tax system due to y, prevalence of business taxes. ‘TAX COLLECTION SYSTEMS, ‘A. Withholding system on income tax - Under this collection system, the paye, of the income withholds or deducts the tax on the income before releasing ty same to the payee and remits the same to the government. The following ay 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 (ie. deducted) by employers against te ‘compensation income to their employees b. Expanded withholding tax - an estimated tax required by the overnment to be deducted on certain income payments made by taxpayers engaged in business The creditable withholding tax is intended to support the self-assessmen ‘method to lessen the burden of lump sum tax payment of taxpayer ani also provides for a possible third-party check for the BIR of non-complian taxpayers. 2, 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. Similarities of final tax and creditable withholding tax a. Inboth cases, the income payor withholds a fraction ofthe income and rem the same to the government, b. By collecting at the moment cash Is available, both Serve to minimize cast flow oroblems tothe taxpayer and collection problems tothe government. 2 Chapter 2- Taxes, Tax Laws and Tax Administration Differences between FWT and CWT Final Withholding | Creditable Withholding Tax Tax Tncome tax withheld Fall Oriya portion Coverage of Certain passive income | Certain passive and active withholding income Who remits the actual Tacome payor | Income payor for the CWT and tox. the taxpayer forthe balance ‘Necessity ofincome tax | _Notrequired Required return for 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 Jaw requires withholding of the relevant business tax (Le. VAT or percentage tax). Business taxation is discussed under Business and Transfer Taxation by the same author. 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 a summary proceeding or judicial proceedings 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: 41, Fiscal adequacy 2. Theoretical justice 3. Administrative feasibility 4BChapter 2 - Taxes, Tax Laws and Tax Administration Fiscal adequacy Fiscal adequacy requires that the sources of government funds must be sufficien, to cover government costs. The government must not incur a deficit. A budge, deficit paralyzes the government's ability to deliver the essential public services t the people. Hence, taxes should increase in response to increase in governmeny spending, Theoretical justice Theoretical justice or equity suggests that taxation should consider the taxpayer’. ability to pay. It also suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory. ‘Administrative feasibility 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 ofthe principle of administrative feasibi 1. B-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 forthe fling 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 4. 1 Commissioner 2. 4 Deputy Commissioners, each to be designated to the following: a. Operations group bb. Legal Enforcement group c. Information Systems Group Resource Management Group ‘POWERS OF THE BUREAU OF INTERNAL REVENUE ‘ 1. Assessment and collection of taxes, e286 09 2. Enforcement of all forfeitures, penalties and fines, and judgments in all cases decided ints favor by the courts ~ 44 chapter 2 - Taxes, Tax Laws and Tax Administration Giving effect to, and administering the supervisory and police po conferred to it by the NIRC and other laws ‘Assignment of internal revenue officers and other employees to other duties \\ Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials 6, Issuance of receipts and clearances 7, Submissfon 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 4, Tointerpret the provisions of the NIRC, subject to review by the Secretary of Finance 2, Todecide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals, such as: a. Disputed assessments , Refunds of internal revenue taxes, fees, or other charges . Penalties imposed d._ Other NIRC and special law matters administered by the BIR 3. To obtain information and to summon, examine, and take testimony of [persons to effect tax collection Purpose: For the CIR to ascertain: a. The correctness of any tax return or in making a return when none has been made by the taxpayer b. The tax liability of any person for any internal revenue tax or in correcting any such liability Tax compliance of the taxpayer Authorized acts: a. Toexamine any book, paper, record or other data relevant to such inquiry b. To obtain on a regular basis any information from any person other than the person whose internal revenue tax liability is subject to audit To summon the person liable for tax or required to file a return, his employees, or any person having possession and custody of his books of accounts and accounting records to produce such books, papers, records or other data and to give testimony l To take testimony of the person concerned, under oath, as may be ‘relevant or material to the inquiry To cause revenue officers and employees to make canvass of any revenue district 45Chapter 2 - Taxes, Tax Laws and Tax Administration 4 5 ). To terminate tax period when the taxpayer is: To make an assessment and administration and enforcement ‘To examine tax returns and determine tax due thereon, ‘The CIR or his duly authorized representatives may authorize the examination of any taxpayer and the assessment of the correct amount of tay notwithstanding any law requiring the prior authorization of any governmen, agency or instrumentality. Failure to file a return shall not prevent the Cip from authorizing the examination, prescribe additional requirement for «,, ‘Tax or deficiency assessments are due upon notice and demand by the CIR o, hisrepresentatives. Returns, statements or declarations shall not be withdrawn but may be ‘modified, changed and amended by the taxpayer within 3 years from the date of filing, except when a notice for audit or investigation has been actually served upon the taxpayer. ‘When a return shall not be forthcoming within the prescribed deadline or ‘when there is a reason to believe that the return is false, incomplete or erroneous, the CIR shall assess the proper tax on the basis of best evidence available. In case a person fails to file a required return or other documents at the time prescribed by law or willfully files a false or fraudulent return or other documents, the CIR shall make or amend the return from his own knowledge and from such information obtained from testimony. The return shall be presumed prima facie correct and sufficient for all legal purposes. To conduct inventory taking or surveillance ‘To prescribe presumptive gross sales and receipts for a taxpayer when: ‘a, The taxpayer failed to issue receipts; or b. The CIR believes that the books or other records of the taxpayer do not correctly reflect the declaration in the return, ‘The presumptive gross sales or receipt shall be derived from the performance of similar business under similar circumstances adjusted for other relevant information. a. Retiring from business b. Intending toleave the Philippines Intending to remove, hide, or conceal his property 46 chaper 2 - Taxes, Tox Laws and Tax Adminstration 4. Intending to perform any act tending to obstruct the proceedings for the collection ofthe tax or render the same ineffective ‘The termination of the taxable period shall be communicated through a notice tothe taxpayer together with a request for immediate payment. Taxes shall be due and payable immediately. 9, Toprescribe real property values ‘The CIR is authorized to divide the Philippines into zones and prescribe real property values after consultation with competent appraisers. The values thus prescribed are referred to as zonal value. Zonal values are subject to automatic adjustment once every 3 years through rules and regulations issued by the Secretary of Finance based on the current Philippine valuation standards. However, no adjustment in zonal valuation shall be valid unless published in a newspaper of general circulation in the province, city or municipality concerned, or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and in 2 other conspicuous public places therein. Furthermore, the basis of any valuation, including the records of consultations done, shall be public records open to the inquiry of any taxpayer. For purposes of internal revenue taxes, fair value of real property shall mean. ‘whichever is higher of: a. Zonal value prescribed by the Commissioner b. Fac market value as shown in the schedule of market values of the Provincial and City Assessor's Office ‘The NIRC previously used the assessed value which is merely a fraction of the fair market value. Assessed value is the basis of the real property tax in local taxation, The value to use now is the full fir value of the property. 10, To compromise tax liabilities of taxpayers Where the basic tax involved exceeds P1,000.000. or where the settlement offered is less than the prescribed minimum rates, the compromise shall be Subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four Deputy Commissioners. 11, To inquire into bank deposits, only under the following instances: Determination of the gross estate of 2 decedent 4. Tosubstantiate the taxpayer's claim of financial incapacity to pay tax in an application for tax compromise 47Chapter 2 - Taxes, Tax Laws and Tax Administration In cases of financial incapacity, inquiry can proceed only if the taxpayey waives his privilege under the Bank Deposit Secrecy Act. 12, To accredit and registe tax agents ‘The denial by the CIR of application for accreditation is appealable to the Department of Finance. The failure ofthe Secretary of Finance to act on the appeal within 60 days is deemed an approval 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 Aivision 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 Exceptionally, the Regional Evaluation Boards may compromise tax liabilities ‘under the following: ‘a. Assessments are issued by the regional offices involving basic deficiency. tax of P500,000 or less, and b. Minor criminal violations discovered by regional and district officials Composition ofthe Regional Evaluation Board, a. Regional Director as chairman b. Assistant Regional Director Heads ofthe Legal, Assessment and Collection Division 4d. Revenue District Officer having jurisdiction over the taxpayer 4, The power to assign and reassign internal revenue officers to establishments ‘where articles subject to excise tax are produced or kept. Rulesin assignments of revenue officers to other duties 4. Revenue officers assigned to an establishment where excisable articles are ‘Kept hall in no case stay there for more than 2 years, a paper 2 Taxes, Tax Laws and Tax Administration Revenue officers assigned to perform assessment and collection function shall rotremain in the same assignment for more than 3 years. ‘assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed 1 year. ‘gents and Deputies for Collection of National Internal Revenue Taxes ‘The following are constituted agents for the collection of internal revenue taxes: 4. The Commissioner of Customs and his subordinates with respect to collection ofnational internal revenue taxes on imported goods. 2, Thehead of appropriate government offices and his subordinates with respect tothecollection of energy tax. 3, Banks duly accredited by the Commissioner with respect to receipts of ‘payments of internal revenue taxes authorized to be made thru banks. These arereferred to as authorized government depositary banks (AGDB). (OTHER AGENCIES TASKED WITH TAX COLLECTIONS OR TAX INCENTIVES RELATED FUNCTIONS 4, Bureau of Customs 2, Board of Investments ine Economic Zone Authority 4, Local Government Tax Collecting Ui 5. Fiscal Incentives Review Board Bureau of Customs (BOC) Aside from its regulatory functions, the Bureau of Customs is tasked to administer collection of tarifis 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 is assisted by five Deputy Commissioners and 14 District Collectors. 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 ‘ofeconomic 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 (DT), OE csChapter 2 - Taxes, Tax Laws and Tax Administration ‘The BOI is composed of five full-time governors, excluding the DTI secretary as i, chairman. The President of the Philippines shall appoint a vice chairman of t), board who shall act as the BOI's managing head. Philippine Economic Zone Authority (PEZA) ‘The PEZA is created to promote investments in export-oriented manufacturin industries in the Philippines and, among other myriads of functions, supervise thy ‘grant of both fiscal and non-fiscal incentives. PEZA registered enterprises enjoy tax holidays for certain years, exemption fron {import and export taxes including local taxes. The PEZA is also an attached agency ofthe DTI. ‘The PEZA is headed by a director general and is assisted by three deputy directors. ‘Local Government Tax Collecting Units Provinces, municipalities, cities and barangays also imposed and collect: various Jocal taxes, fees and charges to rationalize their fiscal autonomy. ‘The special tax treatments of BOL-resistered or PEZA-registered enterprises including the local taxes imposed by local governments will be discussed under Local & Preferential Taxation by the same author. Fiscal Incentive Review Board (FIRB) FIRB has oversight function on the administration and grant of tax incentives by the Investment Promotion Agencies and other government agencies administering tax incentives. It approves or disapproves grant of tax incentives to private entities and tax subsidies to government-owned and controlled corporations government instrumentalities, government commissaries, state universities and colleges. ‘TAXPAYER CLASSIFICATION FOR PURPOSES OF TAX ADMINISTRATION For purposes of effective and efficient tax administration, taxpayers are classified into: 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 Revent®| District Offices (RDOs) where the business, trade or profession of the taxpay®" issituated chapter 2 - Taxes, Tax Laws and Tax Administration criteria for Large Taxpayers: ‘A. Asto payment 4. Value Added Tax - Atleast P200,000 per quarter for the preceding year 2, Excise Tax - At least P1,000,000 tax paid for the preceding year 3, Income Tax - At least P1,000,000 annual income tax paid for the preceding ear 1 Wiholing Tax: At east P1000,000 annual withholding tax payments or remittances from all types of withholding taxes 5, Percentage tax - At least P200,000 percentage tax paid or payable per quarter forthe preceding year 6. Documentary stamp tax - At least P1,000,000 aggregate amount per year B. Astofinancial conditions and results of operations 4. Gross receipts or sales - P1,000,000,000 total annual gross sales or receipts 2, Networth - P300,000,000 total net worth at the close of each calendar or fiscal year 3. Gross purchases - P800,000,000 total annual purchases for the preceding year 4, Top corporate taxpayer listed and published by the Securities and Exchange Commission Automatic classification of taxpayers as large taxpayers ‘The following taxpayers shall be automatically classified as large taxpayers upon notice in writing by the CIR: 4, Allbranches 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 large taxpayer A corporation that absorbs the operation or business in case of spin-off of any large taxpayer 3. Corporation with an authorized capitalization of atleast P300,000,000 registered with the SEC Multinational enterprises with an authorized capitalization or assigned capital of atleast P300,000,000 Publicly listed corporations Universal, commercial, and foreign banks (the regular business unit and foreign icy deposit unit shall be considered one taxpayer for purposes of classifying large taxpayer) rate taxpayers with at least P100,000,000 authorized capital in banking, telecommunication, utilities, petroleum, tobacco, and alcohol industries taxpayers engaged in the production of metallic minerals 51Chapter 2 - Taxes, Tax Laws and Tax Administration CHAPTER 2: SELF-TEST EXERCISES eee—e—e—eE—EeEeee Discussion Questions. Distinguish tax law from tax exemption aw. Enumerate the sources oftax laws, Discuss the nature of Philippine tax aw. Distinguish tax laws, revenue regulations, and rulings. Define tax and identify its elements. classification. penalty. 8. Whatisa tax system? What are its types? ‘9, Enumerate the principles ofa sound tax system. Explain each. 10. Enumerate the powers ofthe BIR. What are the classifications of taxes? Enumerate and provide examples for ea Compare tax with revenue, license, toll debt, special assessment, tariff, ang chapter 2- Taxes, Tax Laws and Tax Administration xerelse Drill No.2 feat item is described by the following: ierefersto all income collections of the governments Ttis an imposition for the support of the government. z PE venii oor lad elacrtts patie prorat 4__Itisimposed on imported and exported commodities. F_ Itisa charge imposed prior to the commencement of business or exercise of a profession. 4_Itisa post-activity rather than a pre-activity imposition 7,_ kis subject to compensation or set-off G_Itisa charge for the use of others’ property. 9,_Itis an imposition intended to discourage an act. 70, Itarises from contracts rather than from law. -pxereise Drill No. 3 {ndicate the criteria for the selection of large taxpayer for each ofthe follows 411. Enumerate the non-del ofthe erate the non-delegated powers ofthe CIR. ree payer Exercise Drill No.1 4, Value Added Tax Identify the typeof tax that i described by the folowing 7, Excise Tax 3, Income Tax. 1A consumption tax collected by non-VAT businesses 4, Withholding Tax 2, Taxon gratuitous transfer of property by a living donor 3. Tax that decreases in rates as the amount or value of the tax object increases Percentage Tax @ Documentary Stamp Tax ‘sto conditions and operations 1. Gross receipts or sales Tax collected upon persons who are not the statutory taxpayers, 2_Networth 3. Gross purchases ‘Tax that isimposed based on the value of the tax object Tax for general purpose Multiple Choice - Theory: Part 1 “Tax imposed by the national government 1. Which is not a source of tax law? “Atax on sin products or non-essential commodities a. CHED regulations Imposed on the gratuitous transfer of property upon death 4, BIR Rulings 0, Tax on residents ofa country 11. Taxthat remains at flat rate regardless ofthe value of the tax object 12, Taxwhich is collected on a per unit basis 13, Tax collected upon the statutory taxpayer 74. Taximposedto regulate businesses or professions 415, Taxupon performance ofan actor enjoyment ofa privilege 52 > taxis regarded as a direct. personal. _ indirect. 4. illegal ad valorem taxes, except one Select the exception, ll tax Real property tax. tax . Capital gains tax on real property capital asset power can be used to destroy Tevenue measure. _c.as an implement of police power. |ifthe tax is invalid. d. when the State isin dire need of funds. 53 2, When tax is collected upon someone who is effectively reimbursed by another, theChapter 2 - Taxes, Tax Laws and Tax Administration chapter 2 - Taxes, Tax Laws and Tax Administration 15, Ataxthat is imposed upon the performance ofan act, the enjoyment ofa privilege orthe engagement in a profession is known as ‘a. income tax, excise tax b, license. transfer tax Which isnot a characteristic oftax? a._Itisan enforced contribution. »,_Itis generally payable inmoney. c_Itissubjectto assignment. d._Itislevied by the law-making body ofthe State having jurisdic 46, Which isa national tax? 6 Taxas to source is dassifedas 4 fealproperty tax ¢ Income tax a. Fiscalorregulatory National or local tax . Community tax 4. Professional tax 'b, Director indirecttax 4. Specific ord valorem tax. 47, Which of the following distinguishes license from tax? 7. Which ofthe followings local tax? 4. Unlimited in imposition . Does not renders business illegal a. Valueaddedtax _c.Documentary stamp tax bh, Imposed for revenue 4. Pre-actvityin application b. Realpropertytax _d. Other percentage taxes PAs corvece i ‘Taxes may be subject to compensation. 8, Taxasto purposeis classified as. a Sere areas tf Natonal ec e b. Tolj being demand of ownership is exercised ony by private ens ear orad valor _Dacion en pago and cession in payment are applicable to taxation. fac abalt Special assessment applies only when public improvement is made. 19, Taxas to determination of amount is classified as | Fiscal orregulatory _c. National or local tax Director indirecttax d. Specific orad valorem tax Taxas to incidence is classified as a. Fiscalorregulatory. Nat . Directorindirecttax 4. Specific or ad valorem tax al or local tax a b. 410. Which is nota nature of tax? ‘A. Tax must not violate Constitutional and inherent limitation, Enforced proportional contribution B. Tax must be uniform and equitable. b. Enforced within the teritorial jurisdiction ofthe taxing authority G Tarmustbe or pub purpose ©. Levied by the la bods ). Tax must be levied by the lawmaking body. ippenibien kil E. Taxmust be proportionate in character. 4. Generally payablein kind ly pay F. Taxis generally payable in money. 11, Taxes that cannot be shifted by the statutory taxpayer are referred to as Which ofthe above is/are not an essential characteristic of valid tax? a. directtaxes. business taxes. a. Allofthe above ¢ None, except F . indirect axes. 4 personal taxes. b. Allexcept F 4. None of the above 412, Tax dassifeations as to object do not include 21, Taxasto rates excludes a. Polltax € Regulatory tax 4 Specifictax Mixed tax b. Property tax 4 Excise tax b, Progressive tax 4 Proportional tax 22, To limit the production of an environmentally harmful commodity, Congress 4 law subjecting the sales of an environmentally unfriendly commodity to 13, Which sa local tax? Speedin Ce 5% tax is imposed on sales exceedin b. Professionaltax Excise tax PLO/kilo tax but a 5% tax is imposed on sales exceeding P100,000. isincorrect? 14, As tosubjectmatter, taxes donot include fax is a combination of an ad valorem tax and specifi tax a. Property tax Poll tax i san example of a regulatory tax. ‘b. Regulatory tax Excise tax i ‘isa national tax. isa local tax. 54we Chapter 2 - Taxes, Tax Laws and Tax Administration 23, Which is not an excise tax? a. Income tax c Estate tax b. Community tax 4. Occupation tax 24, Which isan indirect tax? a. Value added tax € Income tax b. Donor’s tax 4. Real property tax 25, Which isnot an ad valorem tax? ‘a. Real property tax Income tax. b. Excise taxoncigar donor's tax 26. Atax that is imposed based on per unit or per head basis is known as a. Proportional tax Ad valorem tax b. Specifictax 4 Progressive tax 27, Mr. dela Cruz has a tax obligation to the government amounting to P80,000. Since he is leaving the country, he entered into a contract with Mr. Garcia wherein Mr. 3 shall pay the P80,000 tax in his behalf. On due date, Mr. Garcia failed to pay the tax. The BIR sent a letter of demand to Mr. dela Cruz which he refused to pay. ‘Which ofthe following statements is correct? a. The government cannot enforce collection charges against Mr. dela Cruz since b. E a. 28. Philippine tax laws are, by nature, a b. civil 29, Motor vehicles taxis an example of a. Property tax Privilege tax 30, Which of the following statements is correct? a b. c a. the has validly transferred his obligations to Mr. Garcia under the contract. ‘The government can no longer run after Mr. dela Cruz because he is already outside the Philippine territory. ‘The government should wait until Mr. B becomes solvent again. ‘The government should force Mr. A to pay because taxes are non-assignable. «political and civil. political. 4. penal and civil. Income tax Indirect tax ‘The Marshal Doctrine isnot used in practice since itis unconstitutional. ‘An ex post facto tax law violates the constitution, A tax bill personally drafted by the president shall become a law aft! approval by congress. It is in the public interest that errors of public officials shoul bind the government to limit government abuse. Chapter 2 - Taxes, Tax Laws and Tax Administration 31. Who issues revenue regulations? a, Department of Finance c.Commissioner of Internal Revenue b, Congress 4. Commissioner of Customs 432, Tax rulings are issued by the a. Secretary of Finance b. Supreme Court ¢.Court of Tax Appeals . Commissioner of internal Revenue 33. Which of the following fs limited in application? a, Taxlaws c.Taxtreaties b. Revenue Regulations BIR Ruling 34, Which is not a source of tax law? Judicial decisions Opinions of tax experts b. Revenueregulations _d, Taxtreaties and ordinances 35, Which is not an element of tax? ‘a. Itmustbe for public purpose. ', Itmust not violate Constitutional or inherent limitation. ¢ _Itmust be progressive by nature. dd. Itmust be uniform and equitable. 36, Taxas to purpose does not include a. Revenue Regulatory b. Sumptuary Poll 37. When the impact and incidence of taxation are merged into the statutory taxpayer, the tax is known as a Personal tax b. Direct tax c Indirect tax d. National tax 38. Which ofthe following levy is fiscal or revenue by nature? a. Taxlaw geared to phase out a deficitbalance of the government. b. Taxlaw intended to prohibit gambling in the Philippines. © Taxlaw intended to protect local industries. d. Taxlaw supporting the development ofa particular industry. 39. Taxasto object includes a. Personal tax | Property tax isnot an indirect tax? c.Bxcise tax d.Allof these Excise tax d. Personal taxChapter 2 - Taxes, Tax Laws and Tax Administration 41. Atax that cannot be avoided is a. Direct tax ¢ Specific tax b. Indirect tax Personal tax 42, Statement 1: Taxes are voluntary contributions to the government. ‘Statement 2: Taxes are mandatory contributions to the government. Which is correct? a. Only statement 1is correct b. Onlystatement 2s correct. © Both statements are correct. 4, Neither statement is correct. 43, Which is an indirect tax? Other percentage tax c Donor'stax b. Income tax 4. Estate tax 44, Income taxis nota/an Ad valorem tax Revenue tax b. Directtax 4. Property tax 45, Atransfer taxis not a/an a. Regressive tax «National tax b. Ad valorem tax d.Excise tax ‘Multiple Choice - Theory: Part 2 J. Which is intended to regulate conduct? a. Penalty Police power b. License Toll 2, Which is not an excise tax? a. Income tax Personal tax b. Business tax Transfer tax 3. Which of the following do not relate to tax? a. Does not render business ilegal when not pafd ». Arises from law rather than from contracts c. Intended to cover cost of regulations 4. Intended for public purpose 4. A levy from a property which derives some special benefit improvement is a. Specialassessment _c.Taxation one b, Eminentdomain Toll oa cnaoter 2 - Taxes, Tax Laws and Tax Administration ¢, A-Government revenue may come from tax, license, oll and penalties B Penalty may arise either from law or contracts. Which i false? a, Aonly cAand B b. Bonly 4. Neither A nor B 46, What distinguishes tax from license? 4, Taxis regulatory measure. bp, Taxisa demand of ownership. ¢ Taxarises from contract. 4, Taxisa post-activity imposition. 7. Which of the following distinguishes license from tax? 4. Itisimposed under taxation power. by Itisa charge for other's property. Non-compliance to it will render businesses illegal. d._Itis generally payable in money. 8. Theamount imposed is based on the value of the property a. Eminent domain Toll b. License d. Special assessment 9, Toll exhibits all of the following characteristics, except one. Which is the exception? a. Demand of ownership b. Compensation for the use of another's property Maybe imposed by private individuals 4. Levied for the support of the government 10. Which of the following is incorrect? 4 Thecollected tax is referred to as revenue. b, Taxis the sole source of government revenue. License is imposed before commencement of a business or profession. d. Debtcan be subject to compensation or set-off 11, Whatdistinguishes debt from tax? Arises from contract. Non-payment will lead to imprisonment “Never draws interest d. Generally payable in money from publ al spared to tax. ! demand of ownership. jot assignable. ‘not cause imprisonment when not paid. generally payable in money.Chapter 2 - Taxes, Tax Laws and Tax Administration 13, Select the incorrect statement. a. Taxmay be unlimited in amount. ’._Non-payment of license renders the business illegal. ©. Special assessment is nota liability of the person owning the property. AL Spedilanesmentan be impose nbalngand other real Heh attach ‘or pertaining to land. 14, Tax as to subject matter does not include a. Realpropertytax Excise tax b. Personal tax 4. Regulatory tax Multiple Choice - Theory: Part 3 1. Which isnot an application ofa principle ofa sound tax system? ‘a, Taxes should adjust based on government needs Taxation should be progressive. €. Taxation should encourage convenient compliance. 4, None ofthese 2. The Commissioner of internal Revenue is not authorized to interpret the provisions of the National Internal Revenue Code 'b. promulgate Revenue Regulations. terminate an accounting period, 4. prescribe presumptive gross receipts. 3, Which isnot a power of the Commissioner of Internal Revenue? ‘a, Tochange tax periods of taxpayers b, Torefund internal revenue taxes ¢ Toprescribe assessed value of real properties 4. To inquire into bank deposits only under certain cases 4. The principles ofa sound tax system exclude a, Economicefficiency ¢ Theoretical justice b. Fiscaladequacy 4.Administrative feasibility 5. Which ofthe following best describes the effect of tax condonation? a Itonly covers the unpaid balance ofa tax liability. ’, tis conditional on the taxpayer paying some portion of the unpaid tax. c._ It generally applies to all taxpayers. d. Allofthese 6. By which principle ofa sound tax system isthe elasticity in tax rates: a. Theoretical justice c. Administrativefeasibility . Fiscal adequacy 4. All ofthese fs justified? chapter 2 - Taxes, Tax Laws and Tax Administration Violation of this principle will make a taxlaw invalid 4 Fiscal adequacy Administrative feasibility , Theoretical justice d. Economic consistency 4, Which ofthe following is not an application of the lifeblood doctrine? "4, The government has the right to select the object of taxation. }p, Taxation is the rule; exemption is the exception. ¢ Claim for exemption is strictly construed against the taxpayer. a. None of these 9, Which s true with tax amnesty? a, Itisunconditional by. Itcovers both criminal and civil liability ofthe taxpayer. ¢_ Itapplies for past and future non-compliance a. Allof these 410, Which one of the following is the BIR not empowered to do? a Assess national taxes b, Collect income, business and transfer taxes € Assess and collect local taxes d. Enforce forfeitures, penalties and fines 11. Which principle demands that ax should be just, reasonable, and fair? a Theoretical justice _c. Administrative feasibility b, Fiscal adequacy . Economic consistency 12, Which among the following powers of the Commissioner of Internal Revenue can be delegated? a The power to conduct inventory surveillance The power to recommend promulgation of revenue regulations. & The power to issue rulings of first impression. 4. The power to reverse a ruling, amend or modify an existing ruling. 13. The Commissioner of Internal Revenue is not empowered to a Make or amend a tax return for and in behalf of the taxpayer. b. Obtain information and to summon, examine, and take testimony of persons to.effect tax collections. _ Compromise tax liabilities of taxpayers. Grant amnesty for erring taxpayers. of the following may tax exemption come from? claw G.All of theseChapter 2 - Taxes, Tax Laws and Tax Administration 415. Exemption based upon which ofthe following is repealable? Contract claw b. Constitution 4.None of these 16, Select the incorrect statement regarding tax amnesty and condonation. a. Intax amnesty, violators are required to pay a portion ofthe tax assessed, b, When the remaining unpaid portion of the tax is condoned, the taxpaye, cannot ask for refund forthe balance already paid. ¢ Taxamnesty operates asa general pardon ands rarely available, 4. Tax condonation operates on the whole balance of the assessed tax; hence, th, taxpayer can ask for refund for the paid portion of the tax. y 17. Which of the following s a power ofthe Commissioner of Internal Revenue? Assessment and collection of taxes Enforcement ofall forfeitures, penalties, and fines Interpretation of the provisions of the NIRC Giving effect to and administering the supervisory and police powers ‘conferred by the NIRC and other laws pose 18. The Commissioner of internal Revenue can delegate the power to * a. refund orcredit internal revenue tax. }b. recommend rules and regulations to the Secretary of Finance. © assign and re-assign revenue ofier to establishments of excisable articles. 4. compromise or abate tax liability 49. The BIRis under the supervision of. a. the Bureau of Customs. . the Department of Finance. b. the President. 4. Congress. 20, Asto tax payments measures, which ofthe following threshold for the qualification as large taxpayer is incorrect? a. Annual income tax payments of PIM 'b, Annual value added tax payments of PIM Quarterly percentage tax payments of P200,000 dd, Annual documentary stamp tax of PM 21, Who is nota large taxpayer? a. Mining companies Listed companies Banks with P120M authorized capital .None of these 22, Interms of financial measures, which ofthe following threshold for qualificatio" as lage taxpayers is incorrect? a. Gross receipts exceeding P1B b, Networth exceeding P300M Gross purchases exceeding P800M 4. Gross sales exceeding P1.5B ~ i 5 nepter 3 - Introduction to Income Tax CHAPTER 3 INTRODUCTION TO INCOME TAXATION ee ‘chapter Overview and Objectives of income, and the ‘This chapter discusses the concept of tax income, the types oftaxpayers. ‘After this chapter, readers are expected to comprehend and demonstrate knowledge on the following: 4, The concept of gross income 2, Thetypes of income taxpayers 3, Thegeneral rules in income taxation 4,_Theincome tax situs rules ‘THE CONCEPT OF INCOME Whyis income subject to tax? Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an ‘excellent object of taxation in the allocation of government costs. ‘Whatis income for taxation purposes? The tax concept of income is simply referred to as “gross income” under the NIRC. Ataxable item of income is referred to as an "item of gross income” or “inclusion in gross income”. Gross income simply means taxable income in layman’s term. Under the NIRC however, the term “taxable income” refers to certain items of gross income less deductions and personal exemptions allowable by law. Technically, gross income {sbroader to pertain to any income that can be subjected to income tax. Gross income is broadly defined as any inflow of wealth to the taxpayer from Whatever source, legal or illegal, that increases net worth. Itincludes income from employment, trade, business or exercise of profession, income from properties, id other sources such as dealings in properties and other regular or casual § OF GROSS INCOME on capital that increases net worth. id benefit. ‘exempted by law, contract, or treaty.