TAXES, LAWS, SYSTEMS

AND ADMINISTRATION
Module No. 2

BAINCTAX
Income Taxation

LEARNING OUTCOMES TOPICS INCLUDED

At the end of this module, you are expected to: Included in this module are the following:
1. Define taxes and identify its essential elements; 1. Taxes and Other Government Collections
2. Classify taxes as to different criterion and differentiate 2. Tax Laws and Administrative Issuances
them as to other government revenues; 3. Tax Systems
3. Define tax laws and its types, sources and nature; 4. Tax Administration
4. Explain the rules on the interpretation of vague tax
laws;
5. Differentiate the relevant issuances related to the
administration of tax laws;
6. Describe the characteristics of a sound tax system;
7. Differentiate the various tax collection systems;
8. Define tax administration;
9. Enumerate the powers of the BIR;
10. Enumerate the powers of the CIR and determine if it
can be delegated or not;
11. Identify the other revenue-related government bodies;
and
12. Identify the criteria for determining large taxpayers.
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Pre-Activity
Match Column A with Column B.
Column A Column B
Toll - 1 A – most likely similar with proportional tax
CIR - 2 B – sources of funds must be sufficient to cover costs
Fiscal Adequacy - 3 C – the highest official of the Bureau of Internal Revenue
Progressive – 4 D – a charge for the use of others’ property
Ad valorem - 5 E – an agency tasked for collection of tariffs
BOC- 6 F – tax rates increase as the tax base increase
Revenue Issuances - 7 G – a source of tax law from the BIR

TAXES
Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the State by virtue of its sovereignty for the support of the government and all
public needs.

Essential Elements
The following are the essential elements of taxes.

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.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It must be uniform and equitable.
7. It must not violate constitutional and inherent limitations.
8. It is levied by the law-making body of the State.
9. It is levied for public purpose or purposes.

Classifications
Taxes may be classified as to different categories.

Fiscal or Revenue A tax imposed on general purpose

A tax imposed to regulate business, conduct, acts or
Regulatory
As to Purpose transactions
A tax levied to achieve some social or economic
Sumptuary
objectives

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Personal or Poll or A tax on persons who are residents of a particular

Capitation territory
As to Subject Property Tax A tax on properties whether real or personal
Matter A tax imposed upon the performance of an act,
Excise or Privilege
enjoyment of a privilege or engagement in an
Tax
occupation

A tax where the statutory and economic taxpayer are

Direct Tax
As to the same person
Incidence A tax where the statutory and economic taxpayers are
Indirect Tax
not the same person

Statutory vs. Economic Taxpayer

The statutory taxpayer is the one named by the law to pay the tax levied. On the other hand, the
economic taxpayer is the one who actually pays and carries the burden of the tax. These two
taxpayers may not necessarily be the same person. This depends on the kind of tax being paid.

A tax of a fixed amount imposed on a per unit basis

Specific Tax
As to such as per kilo, liter, meter, etc.
Amount A tax of a fixed proportion upon the value of the tax
Ad Valorem
object

Proportional Tax This is a flat or fixed rate tax

Progressive or This is a tax which imposes increasing rates as the tax
graduated tax base increases
As to Rate This is a tax which imposes decreasing rates as the tax
Regressive Tax
base increases
This is manifest tax rates which is a combination of any
Mixed Tax
of the above types of tax

As to National Tax Tax imposed by the national government

Authority Local Tax Tax imposed by local government units

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Other Government Collection Terms

Tax vs. Revenue
Tax refers to the amount imposed by the government for public purposes. Revenue refers to all
income collections of the government which include taxes, tariff, licenses, toll, penalties and
others. The amount imposed is tax but the amount collected is revenue. All taxes are revenue
but not all revenues are taxes.

Tax vs. License Fee

Tax has a broader subject than license. Tax emanates from taxation power and is imposed upon
any subject to raise revenue. License fees emanate from police power and is imposed to regulate
exercise of such privilege such as the commencement of a business or profession. Taxes are
imposed after the commencement of a business or profession whereas license fee is imposed
before engagement in those activities. In other words, tax is a post-activity imposition whereas
license is pre-activity imposition.

Tax vs. Toll

Tax is a levy of government; hence, it is a demand of sovereignty. Toll is a charge for the use of
other’s property; hence, it is a demand of ownership. The amount of tax depends upon the
needs of the government, but the amount of toll is dependent upon the value of the property
leased. Both the government and private entities impose toll, but private entities cannot impose
taxes.

Tax vs. Debt

Tax arises from law while debt arises from private contracts. Non-payment of tax leads to
imprisonment, but non-payment of debt does not lead to imprisonment. Debt can be subject to
set-off but tax is not. Debt can be paid in kind but tax is generally payable in money.

Tax vs. Special Assessment

Tax is an amount imposed upon persons, properties or privileges. Special assessment is levied
by the government on lands adjacent to a public improvement. It is imposed on land only and is
intended to compensate the government for a part of the cost of the improvement. The basis of
special assessment is the benefit in terms of the appreciation in land value caused by the public
improvement.

Tax vs. Tariff

Tax is broader than tariff. Tax is an amount imposed upon persons, properties and privileges.
Tariff is the amount imposed on imported or exported commodities.

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Tax vs. Penalty

Tax is an amount imposed for the support of the government. Penalty is an amount imposed to
discourage an act. Penalty may be imposed by both the government and private individuals. It
may arise both from law or contract whereas tax arises from law.

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

Types
Tax laws can be classified into two categories depending on their effect on both the government
and the taxpayer.

Tax Laws
These are laws that provide for the assessment and collection of taxes.

Examples:
1. The National Internal Revenue Code (NIRC)
2. The Tariff and Customs Code
3. The Local Tax Code
4. The Real Property Tax Code

Tax Exemption Laws

These are laws that grant immunity from taxation.

Examples:
1. The Minimum Wage Law
2. The Omnibus Investment Code of 1987 (E.O. 226)
3. Barangay Micro-Business Enterprise (BMBE) Law
4. Cooperative Development Act

Nature
The Philippine Internal Revenue laws are generally civil in nature; they are neither political nor
penal in nature.

Although tax laws deal with the fundamental symbiotic relationship of people with the
government, basically they are not political in nature. They remain effective even if foreign
invaders occupy our country. They are deemed to be the laws of the occupied territory and not
of the occupying enemy. Hence, it is valid and legal that income tax returns shall be filed and

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paid by the inhabitants even if foreign invaders occupy our country. Even if there are some
penalties provided for violation of tax laws, they are not penal in nature because they do not
define crimes and provide for their punishment. The internal revenue law provides for some
penalties for tax delinquencies only to effect timely payments of taxes or punishes tax evasion
for neglect of duty by those subjects of taxation.

Revenue laws are not remedial laws. They do not include procedures to protect rights; and
prevent or rectify wrong doings.

The Tax Code are special laws which prevail over general laws such as Civil Code or Rules of
Court. Accordingly, the provisions of the NIRC on prescription arc given priority over the
provisions of Civil Code on prescriptions.

Sources
With the exercise of the power of taxation, tax laws provide guidance on its scope. The
following are the common sources of tax statutes.

Constitution of the Philippines

The term Constitution refers to that body of rules and maxims in accordance with which the
powers of sovereignty are habitually exercised. It is often referred to as the Supreme or
Fundamental Law of the land because all other laws must conform to it. It is the basis in
determining the legality of all-governmental actions and decisions. A constitutional provision
regarding taxation is primarily intended to limit and regulate the exercise of taxation power.
The State can exercise the power to tax even if the Constitution is completely silent about
taxation.

Statutes
Statutes are laws enacted and established by the will of the legislative department of the
government. The present tax statutes of the Philippines are embodied in the Republic Act No.
8424, which is now the prevailing NIRC effective January 1, 1998, which was amended by
various republic acts and revenue regulations.

Judicial Decisions
These refer to the decisions for application made concerning tax issues by the proper courts
exercising judicial authority of competent jurisdiction. These courts may be the Supreme Court
and the Court of Tax Appeals. Their decisions on tax laws comprise the greater portion of tax
jurisprudence. They form part of the legal system of the Philippines. By the nature of its
jurisdiction, the decisions of the Court of Tax Appeals are still appealable to the Supreme Court.
The decision of the Supreme Court on any matter is final and executory.

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Executive Orders
Executive orders are regulations issued by the President or some administrative authority
under his direction for the purpose of interpreting, implementing, or giving administrative
effect to a provision of the Constitution or of some law or treaty.

Tax Treaties and Conventions

These refer to the treaties or international agreements with foreign countries regarding tax
enforcement and exemptions. They have the force and effect of law.

Local Tax Ordinances

These are tax ordinances issued by the Province, City, Municipality and Barrio subject to such
limitations as provided by the Local Government Code and the Real Property Tax Code.

Steps in the Legislative Process

Under the 1987 Philippine Constitution, all revenue and tariff bills shall originate from the
House of Representatives. A revenue bill is one that levies taxes and raises funds for the
government while a tariff bill specifies the rates or duties to be imposed on imported article.

Often, major tax proposals are initiated by the Executive Department thru the President upon
the recommendation of the Department of Finance based on the latter's study or proposal, and
then introduced into Congress by the allies of the President.

The steps in the legislative process are as follows:

1. A tax bill is introduced in the House of Representatives and is referred to the House
Committee on Ways and Means. This is known as the first reading. The first reading
involves only a reading of the number and title of the measure. All appropriation
revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
2. The proposal is considered by the Committee on Ways and Means. Committee
hearings as well as public hearings are held If there are several bills of the same
nature or purpose, they shall all be consolidated in the conduct of the hearings.
Moreover, the committee may introduce amendments or propose substitute bill.
3. The tax bill is voted on by the Committee and if approved, is reported out to the
House of Representatives for a vote. Deliberations, interpellations and even
amendment by the members of the House are held. This is known as the second
reading in the House.
4. If passed by the House, the bill is transmitted to the Senate for consideration by the
Senate Committee on Ways and Means and public hearings are held. This is known

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as the second reading in the senate. The bill undergoes the same legislative process
in the Senate.
5. Upon approval by the Senate, both the Senate and the House versions are sent to the
Bicameral Conference Committee consisting of representatives of the House and of
the Senate.
6. The two versions are generally dissimilar. Thus, the conflict is reconciled in the
Bicameral Conference Committee. This process of ironing out the differences
generally involves substantial compromise.
7. A final bill as approved by the Bicameral Conference Committee, is then resubmitted
to the House and Senate for approval. This is known as the third reading. Generally,
it shall only be the reading of title. No deliberations will be allowed.
8. If the Bicameral Conference Committee bill is approved by the House and Senate, it
is sent to the President for approval or veto. This is known as the "enrolled bill."
9. If the President approves the bill, he shall sign it and the bill becomes a law. When
the President vetoes it, both Houses may override the veto by two-thirds vote of all
the members of each house. If the required measure is met, the bill is converted into
law over the President's objections. Moreover, the bill may become a law when the
President does not act upon the measure within thirty days after it shall have been
presented to him.

Interpretation of Tax Laws

Though the power of taxation may be broad, tax laws and tax exemptions may be vague that
the application of which may be difficult to determine. If such is the case, proper interpretation
of said laws should be done with consideration of the original intent of the lawmakers at the
time such law is drafted and approved.

The maxim, strictissimi juris, indicates that he, who a tax statute is construed against, bears the
burden of proving relation to said statute. Taxation is the rule, exemption is the exception.

Vague Tax Laws

Ambiguous Tax Laws are construed against the government and in favor of the taxpayer. This
is so because the state is the one imposing a burden to its subjects, thus, it is the taxpayer who
has the right to question the applicability of said tax law to himself. Moreover, a vague tax law
means no tax law. Obligation arising from law is not presumed. This is also in conjunction with
the uniformity and equal protection clause granted by the Constitution. Considering also that it
is the State that drafts tax laws, it should be drafted properly that the approved law should be
clear and concise.

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Vague Tax Exemptions

In the construction of tax statutes, exemptions are construed against the taxpayer and in favor
of the government. The fundamental theory is that all taxable property should bear its share in
the cost and expense of the government. A vague exemption law means no exemption law. The
claim for exemption is construed against the taxpayer in accordance with the lifeblood doctrine.
It is, therefore, the responsibility of the taxpayer that he/she is within the context of said tax
exemption.

Administrative Issuances
To facilitate the administrative act of taxation, the Bureau of Internal Revenue as a body under
the Department of Finance, releases revenue issuances. The following would be the differences
of the issuances.

Revenue Regulations (RRs)

These 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.

Revenue Memorandum Orders (RMOs)

These 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.

Revenue Memorandum Rulings (RMRs)

These are ruling, opinions and interpretations of the CIR with respect to the provisions of the
Tax Code and other tax laws as applied to specific sets 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 consequences in specific situations.

Revenue Memorandum Circulars (RMCs)

These are issuances that publish pertinent and applicable portions, as well as amplifications, of
laws, rules, regulations and precedents issued by the BIR and other agencies/offices.

Revenue Administrative Orders (RAOs)

These 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.

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Revenue Delegation of Authority Orders (RDAOs)

These refer to functions delegated by the Commissioner to revenue officials in accordance with
law.

Revenue Bulletins (RB)

These refer to the period issuance, notices and official announcement of the CIR that consolidate
the BIR’s position on certain specific issues of law or administration on relation to the
provisions of the tax code, relevant tax laws, and other issuances for the guidance of the public.

BIR Rulings
These are official positions of the BIR to queries raised by taxpayers and other stakeholders
relative to clarification and interpretation of tax laws.

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.

Types According to Imposition

Progressive
This is employed in the taxation of income of individuals, and transfers of properties by
individuals.

Proportional

This is employed in taxation of corporate income and business.

Regressive

This is not employed in the Philippines.

Types According to Impact

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 rich.

Regressive System
A regressive tax system is one that emphasizes indirect taxes. Indirect taxes are shifted by
businesses to consumers; hence, the impact of taxation rests upon the bottom end of the society.

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In effect, a regressive tax system is anti-poor. It is widely believed that despite the
Constitutional guarantee of a progressive taxation, the Philippines has a dominantly regressive
tax system due to the prevalence of business taxes.

Tax Collection Systems

Withholding System on Income Tax
The government requires taxpayers to withhold (i.e. deduct) taxes on their income payments
(i.e. expenses). These withheld taxes are called "withholding tax." These are not tax to the
taxpayer but to the recipient of the income payments. The taxpayer must deduct the
withholding tax on his income payments, file a withholding tax return, and remit the withheld
tax to the government.

Non-compliance to the withholding tax rules shall expose the taxpayer to penalties and fines
aside from the disallowance of the expense as deductions against income.

Creditable Withholding Tax

These are taxes withheld on certain passive and active income where can be credited against
income tax due.

Withholding tax on The tax is withheld by the employer from payments of

compensation compensation income to employees
A withholding tax prescribed on certain income payments and is
Expanded
creditable against the income tax due of the payee for the taxable
withholding tax
quarter or year in which the particular income was earned

Final Withholding Tax

A kind of withholding tax which is prescribed on certain income
Final withholding tax payments and is not creditable against any income tax due of the
payee for the taxable year
Withholding System on Business Tax
This is the tax withheld by the national government agencies and instrumentalities including
government-owned and controlled corporations on their payments to taxpayers, suppliers, or
payees.

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." In preparing their tax return, taxpayers declare their income
and expenses, and personally determine the tax due thereon. The government relies on the
good faith of taxpayers in the preparation of their tax returns but employs detective techniques
to ascertain non-compliance or under-compliance. These returns will be further discussed in

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succeeding modules. A portion of the tax due payable herein may have been withheld under
the withholding system, such as:

a. Withholding tax on compensation by compensation earners

b. Expanded withholding tax by taxpayer engaged in business or exercise of profession

The taxes withheld are treated as tax credit (deduction) against the tax due of the taxpayer in
the income tax return. The taxpayer shall pay any balance still due after such credit or claim
refund or tax credit for excess tax withheld.

Assessment or Enforcement System

Under this collection system, the government identifies non-compliant taxpayers, assesses their
tax dues and penalties, and enforces collections by coercive means such as summary proceeding
or judicial proceedings when necessary.

Principles of Sound Tax System

According to Adam Smith, governments should adhere to certain principles or canons to evolve
a sound tax system:

Fiscal Adequacy
The sources (proceeds) of tax revenue should coincide with and approximate needs of
government expenditures. The sources of revenue should be sufficient and elastic to meet the
demands of public expenditures. The government must not incur a deficit. A budget deficit
paralyzes the government's ability to deliver the essential public services to the people. Hence,
taxes should increase in response to increase in government spending.

Theoretical Justice
The tax system should be fair to the average taxpayer and based upon his ability to pay. It also
suggests that the exercise of taxation should not be oppressive, unjust, or confiscatory.

Administrative Feasibility
The tax system should be capable of being properly and efficiently administered by the
government and enforced with the least inconvenience to the taxpayer.

The following are applications of the principle of administrative feasibility:

1. E-filing and e-payment of taxes
2. Substituted filing system for employees
3. Final withholding tax on non-resident aliens or corporations
4. Accreditation of authorized agent banks in the filing and payment of taxes

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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.

BIR Officials
Commissioner of Internal Revenue (CIR)
This is the head of the whole bureau. The duties and powers of this office will be further
discussed in the succeeding pages.

Deputy Commissioners
Four Deputy Commissioners are assigned to the following: (1) Operations Group, (2) Legal
Enforcement Group, (3) Information Systems Group and (4) Resource Management Group.

Assistant Commissioners
Thirteen assistant commissioners are designated to each of the service divisions.

Head Revenue Executive Assistants

Thirteen head revenue executive assistants are designated to each of the service divisions.

Regional Directors
They are the heads of each revenue region which administers and enforces internal revenue
laws including the assessment and collection of all internal revenue taxes, charges and fees from
taxpayers within the region's jurisdiction, as well as ensures proper and effective
implementation of National Office's policies and programs within the Regional Office.

Revenue District Officers

They are the heads of the 123 revenue district offices which mainly provide frontline assistance
and service to taxpayers.

Powers of the BIR

The following are the powers of the Bureau of Internal Revenue as vested by law.

1. Assessment and collection of taxes

2. Enforcement of all forfeitures, penalties and fines and judgments in all cases decided in
its favor by the courts
3. Giving effect to, and administering the supervisory and police powers conferred to it by
the NIRC and other laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials
6. Issuance of receipts and clearances

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7. Submission of annual report, pertinent information to Congress and reports to the

Congressional Oversight Committee in matters of taxation

Powers of the CIR

The Commissioner of Internal Revenue is given the following powers to fulfill the duties and
responsibilities of its office.

1. To interpret the provisions of the NIRC, subject to review by the Secretary of Finance
2. 2. To decide tax cases, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals
3. To obtain information and to summon, examine, and take testimony of persons to effect
tax collection
4. To make assessment and prescribe additional requirement for tax administration and
enforcement
5. To examine tax returns and determine tax due thereon
6. To conduct inventory taking or surveillance
7. To prescribe presumptive gross sales and receipts for a taxpayer when:
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.
8. To terminate tax period when the taxpayer is:
a. Retiring from business
b. Intending to leave the Philippines
c. Intending to remove, hide, or conceal his property
d. Intending to perform any act tending to obstruct the proceedings for the
collection of the tax or render the same ineffective
9. To prescribe real property values
10. To compromise tax liabilities of taxpayers
11. To inquire into bank deposits, only under the following instances:
a. Determination of the gross estate of a decedent
b. To substantiate the taxpayer's claim of financial incapacity to pay tax in an
application for tax compromise
12. To accredit and register tax agents
13. To refund or credit internal revenue taxes
14. To abate or cancel tax liabilities in certain cases
15. To prescribe additional procedures or documentary requirements
16. To delegate his powers to any subordinate officer with a rank equivalent to a division
chief of an office

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Non-delegated Power of the CIR

The following powers of the Commissioner shall not be delegated:

1. The power to recommend the promulgation of rules and regulations to the Secretary of
Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any
existing rulings of the Bureau.
3. The power to compromise or abate any tax liability
4. The power to assign and reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

Rules in assignments of revenue officers to other duties

1. Revenue officers assigned to an establishment where excisable articles are kept shall in
no case stay there for more than 2 years.
2. Revenue officers assigned to perform assessment and collection function shall not
remain in the same assignment for more than 3 years.
3. Assignment of internal revenue officers and employees of the Bureau to special duties
shall not exceed 1 year.

Agents and Deputies for Collection of National Internal Revenue Taxes

The following are constituted agents for the collection of internal revenue taxes:

1. The Commissioner of Customs and his subordinates with respect to collection of

national internal revenue taxes on imported goods.
2. The head of appropriate government offices and his subordinates with respect to the
collection 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 are referred to as
authorized government depositary banks (AGDB).

Other Revenue-Related Government Bodies

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 is assisted by five Deputy
Commissioners and 14 District Collectors.

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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.

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.

Local Government Tax Collecting Units

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

Taxpayer Classification
For purposes of effective and efficient tax administration, taxpayers are classified into large and
non-large. Large taxpayers are under the supervision of the Large Taxpayer Service (LTS) of the
BIR. Non-large taxpayers are under the supervision of the respective Revenue District Offices
(RDOs) where the business, trade or profession of the taxpayer is situated. The following are the
criteria for determining large taxpayers:

Value Added Tax At least P200,000 per quarter for the preceding year
Excise Tax At least P1,000,000 tax paid for the preceding year
At least P1,000,000 annual income tax paid for the
Income Tax
preceding year
As to At least P1,000,000 annual withholding tax payments or
Withholding Tax
payment remittances from all types of withholding taxes
At least P200,000 percentage tax paid or payable per
Percentage tax
quarter for the preceding year
Documentary
At least P1,000,000 aggregate amount per year
stamp tax

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Gross receipts or
As to P1,000,000,000 total annual gross sales or receipts
sales
financial
P300,000,000 total net worth at the close of each
conditions Net worth
calendar or fiscal year
and results of
P800,000,000 total annual purchases for the preceding
operations Gross purchases
year

Top corporate taxpayer listed and published by the Securities and Exchange Commission shall
also be under LTS.

1. All branches of taxpayers under the Large Taxpayer's Service

2. Subsidiaries, affiliates, and entities of conglomerates or group of
companies of a large taxpayer
3. Surviving company in case of merger or consolidation of a large
taxpayer
4. A corporation that absorbs the operation or business in case of spin-off
of any large taxpayer
5. Corporation with an authorized capitalization of at least P300,000,000
registered with the SEC
Automatic
6. Multinational enterprises with an authorized capitalization or assigned
classification
capital of at least P300,000,000
7. Publicly listed corporations
8. Universal, commercial, and foreign banks (the regular business unit and
foreign currency deposit unit shall be considered one taxpayer for
purposes of classifying them as large taxpayer)
9. Corporate taxpayers with at least P100,000,000 authorized capital in
banking, insurance, telecommunication, utilities, petroleum, tobacco,
and alcohol industries
10. Corporate taxpayers engaged in the production of metallic minerals

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Self-Check
Basing on your readings, answer the following questions.
1. What are taxes and how can they be classified?
2. Differentiate taxes from other government collections.
3. What are tax laws and its types?
4. Describe the nature of tax laws.
5. Where do tax laws originate and how do they take effect?
6. If tax laws are vague, how are they interpreted?
7. What are the documents issued to facilitate the administrative act of taxation?
8. When is a tax system considered sound?
9. How are taxes collected?
10. Who are the chief officials of the BIR?
11. What are the powers of the BIR?
12. What are the powers of the CIR? Can it be delegated?
13. What are the other revenue-related government bodies? What are their mandates?

Exercise 2.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. Tax laws must originate exclusively from the House of Representatives.
___________2. The presence of penalties for late filing and payment of taxes suggests that tax
laws are penal in nature.
___________3. Tax exemption laws which are vague as to its provisions must be construed
against the government as this should have been deliberated well when it was
still in the legislative process.
___________4. One characteristic of a sound tax system is that taxes are generally paid in
cash since liquidity is important for the use government funds.
___________5. All of the powers of the Commissioner of Internal Revenue cannot be
delegated.
___________6. In case of discrepancies of GAAP and tax laws, the provisions of tax laws
should be followed in terms of tax reporting.
___________7. The presence of a graduated tax table for personal income tax in the
Philippines suggests the employment of a progressive tax system.
___________8. Tax is a broader term as compared to revenue and tariff.
___________9. Sources of tax laws are only from the legislative and executive branch of the
government.
___________10. Even though the community/poll tax is a local tax, the certificate still bears
the BIR logo.

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Exercise 2.2 IDENTIFICATION

Identify the terminologies best described by the following statements.
___________1. A tax system where the tax rate decreases as the tax base increases
___________2. A tax levied to achieve some social or economic objectives
___________3. Official positions of the BIR to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws
___________4. Amount levied by government on land adjacent to a public improvement
___________5. A tax where the statutory and economic taxpayers are not the same
___________6. Tax withheld on certain income payments which are not creditable against
any income tax due
___________7. The highest official position under the Philippine Economic Zone Authority
___________8. A tax collection system which is also referred to as self-assessment method
___________9. Debt that can be paid in kind
___________10. This is the amount imposed for transactions involving international trade

Exercise 2.3 MULTIPLE CHOICE

Choose the best answer from the choices provided.
______1. When the economic burden of a tax already paid is transferred to another, the tax is
most likely a/n ________________.
a. Direct Tax
b. Indirect Tax
c. Personal Tax
d. Specific Tax

______2. Which is not a characteristic of tax?

a. It is an enforced contribution.
b. It is generally payable in money.
c. It is subject to assignment.
d. It is levied by the law-making body of the State.

______3. Which issues revenue regulations?

a. Commissioner of Internal Revenue
b. Bureau of Internal Revenue
c. Department of Finance
d. Secretary of Finance

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______4. Philippine Tax laws, by nature, are

a. penal
b. civil
c. remedial
d. political

______5. Which of the following do not relate to tax?

a. does not render business illegal when not paid
b. arises from law rather than from contracts
c. intended to cover cost of regulations
d. intended for public purpose

Exercise 2.4 TAX TYPES

Determine the tax type best described by each of the following statements.
___________1. The value-added tax was previously 10% when it was expanded to 12%
___________2. The TRAIN Law removed the use of a graduated tax table for estate tax
___________3. The excise tax on distilled spirits during 2017 was 20% of the net retail price
and P21.63 per proof liter
___________4. Legislative officials are pushing for taxes on junk foods to fund health efforts
against the pandemic
___________5. Excise taxes are mostly capitalized as cost of the merchandise
___________6. In efforts to reduce plastic consumption, an LGU imposed a plastic tax

Exercise 2.5 LARGE TAXPAYERS

Determine whether the following taxpayers are to be supervised under the Large Taxpayer Service.
Write LTS if yes and RDO if not.
_____1. With an excise tax rate of 30% on selling price on its automobiles, Vroom Company
sold five units at P1,500,000 each on the preceding year
_____2. Batty Company paid a total of P200,000 on value-added tax during the preceding
year
_____3. The 2019 Balance Sheet of Cappy Company showed assets of P900 million and
liabilities of P550 million
_____4. The 2019 Income Statement of Netty Company reported a taxable income of
P4,000,000
_____5. Fristy Company had its initial public offering on June 19, 2019

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Case Study 2.1 GOING LOCO ON LOCAL

The Municipality of Santo Cristo, claiming that it can impose taxes under the Local
Government Code, imposed a tax on common carriers in addition to the 3% common carrier’s
tax imposed in the National Internal Revenue Code. The common carriers in the municipality
objected on this ordinance stating that the power of taxation cannot be delegated and that this
constitutes double taxation.

Is their contention tenable?

Case Study 2.2 IS THE COMPROMISE COMPROMISED?

Due to the government budget crunch due to the pandemic, the economic manager of the
country looked into tax compromises and abatements done during the year. Upon evaluation,
it discovered a tax liability of P400,000 which was compromised by the Regional Evaluation
Board. The economic manager stated that the tax compromise is not valid since it is the CIR’s
power for the tax compromise to take effect. He also adds that this power cannot be
delegated.

Is his contention tenable?

Case Study 2.3 THE SOUND OF A SOUND TAX SYSTEM

Assume the same scenario on Case Study 1.2. Instead of spending time on the tax liability at
hand, the economic manager proposed that small-time online sellers should just be sought
after by tax authorities as many have not been reporting their income. With the influx of
transactions via the online media, the economic manager estimates that potential government
revenues are higher than the amount in Case Study 1.2. He also contends that the tax
collections would help achieve the fiscal adequacy principle of a sound tax system.

Various individuals and bodies have expressed their frustrations on this idea. Some have
stated that this proposition is anti-poor and violates the theoretical justice principle of a
sound tax system. It also adds non-financial burden to the liable taxpayers as this would
require additional registration processes and tax filings for them, which they say is also
against the administrative feasibility principle.

Whose contention is more tenable?

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Case Study 2.4 PRESIDENT AT PRESSURE

Being sympathetic to the online selling industry, President Jack A. Moon issued an executive
order granting exemption of small-time online sellers from payment of income and
percentage tax. However, to offset the revenue foregone on this exemption granted, a specific
provision was included in the executive order that online selling platforms shall be imposed
with a 5% digital tax on every sale transaction facilitated.

Comment on the substance and form of the executive order.

TAXES, LAWS, SYSTEMS & ADMINISTRATION | Module No. 2