INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

2nd Sem
Department of Accountancy 2020-2021
INCOME TAXATION

MODULE 1 – GENERAL PRINCIPLES IN TAXATION

TAX
- An enforced proportionate contribution imposed upon persons, properties, businesses, rights,
interests, privileges, transactions and acts within the territorial jurisdiction of the taxing authority
exercise by the legislature for a public purpose and generally payable in money.
- It is a compulsory contribution to state revenue, levied by the government on workers' income and
business profits or added to the cost of some goods, services, and transactions.
- The enforced proportional contributions from persons and property levied by the lawmaking body
of the State by virtue of its sovereignty for the support of the government and all public needs
- It is a sum of money demanded by a government for its support or for specific facilities or services,
levied upon incomes, property, sales, etc.
- An involuntary fee levied on corporations or individuals that is enforced by a level of government in
order to finance government activities.
- A contribution for the support of a government required of persons, groups, or businesses within
the domain of that government.
TAXATION
AS A POWER:
- is the power by which the sovereign raises revenue to defray the expenses of government.
- is the inherent power of the state to demand enforced contribution for public purpose to support
the government.
- Is the destructive power which interferes with the personal and property rights of the people and
takes from them a portion of their property for the support of the government.

AS A MEANS OR PROCESS:
- is the process or means by which the sovereign, through its lawmaking body, raises income to
defray the necessary expenses.
- Is the means by which governments finance their expenditure by imposing charges on citizens and
corporate entities.
- is the process or means by which the sovereign through its law-making body, imposes burdens
upon subjects or objects within its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of the government.

AS A PRICE:
- is the indispensable and inevitable price for civilized society.

AS AN ACT:
- is the legislative act of levying/imposing a tax to raise income for the government to defray its
necessary expenses
- refers to the act of a taxing authority actually levying tax.
- is the practice of collecting taxes (money) from citizens based on their earnings and property.

AS A MODE OF COST ALLOCATION:

- is a way of apportioning the cost of government among those who in some measure are privileged
to enjoy its benefits and must bear its burden
ELEMENTS OF A VALID TAX
1. must not violate the constitutional, inherent and or contractual limitation of the power of taxation
2. must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or discriminatory
3. must be for a public purpose
4. must be levied by the taxing power (legislature) having jurisdiction over the object of taxation
5. must be proportionate in character

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INCOME TAXATION

6. generally payable in money

PURPOSES/OBJECTIVES OF TAXATION
1. Primary (Revenue or Fiscal) – to raise revenue to promote the general welfare and protection of its
citizens
2. Secondary
a. Regulatory – to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the State.
b. Compensatory – to provide some sort of compensation to an activity
c. Promotion of general welfare – as an implement of police power
d. Reduction of social inequality – progressive system of taxation prevents the undue
concentration of wealth in the hands of the few (those who have more should pay more)
e. Encourage economic growth by granting incentives and exemptions
f. Protect local industries from foreign competition
THEORY OR UNDERLYING BASIS OF TAXATION/PRINCIPLES BEHIND THE POWER OF TAXATION
1. Lifeblood Theory –
- The existence of the government is a necessity; it cannot exist nor endure without means to
pay its expenses; and for those means, the government has the right to compel all its
citizens and property within its limits to contribute in the form of taxes.
- Taxes are indispensable to the existence of the State. Without taxation the State cannot
raise revenue to support its operations
- Taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it.
- Principles of Necessity/Theory of Taxation
2. Benefit-Received Theory or Benefits-Protection Theory or Reciprocity Theory
- the government and the people have the reciprocal and mutual duties of support and
protection
- Basis of Taxation
- Doctrine of Symbiotic Relationship – every person who is able to must contribute his share
in the running of the government. The government, for its part, is expected to respond in
the form of tangible and non-tangible benefits intended to improve the lives of the people
and enhance their moral and material values.
INHERENT POWERS OF THE GOVERNMENT
1. Power of Taxation – the power to take property for the support of the government and for public
purpose
2. Police Power – the power to enact laws to promote the general welfare of the people. It is wider in
application because it is the general power to make laws.
3. Power of Eminent Domain – the power to take private property for public use upon payment of just
compensation (Power to Expropriate)
Elements:
a. Permanent taking of private property (not temporary)
b. Payment of Just Compensations (Market value / zonal / assessed)
c. Public use

Distinctions of the Inherent Powers of the State

Taxation Police Power Eminent Domain
Who exercises State State state or private entities
authority or power? (quasi-public
corporations or public
utilities)
Necessity of Delegation is not Valid delegation Valid delegation thru
Delegation necessary since it is thru legislative act legislative act (law) e.g.

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INCOME TAXATION

inherent (law) franchise

Purpose Revenue to support Protection or Property is taken for
the government regulation for public use
general welfare
Persons affected Community or class Community or class Specific person (owner
of individuals of individuals of the property)

Effect of transfer of Tax paid goes to There is no transfer There is transfer of right
property rights treasury (becomes of title, at most to property whether it
part of the public there is restraint on be of ownership or
fund) the injurious use of lesser right
property
Amount of Generally, unlimited Sufficient to cover No imposition, the
Imposition the costs of owner is paid the fair
regulation market value of his
property
Importance Most important of Most superior
the three
Relationship with Inferior to the “Non- Superior to the Superior and may
the Constitution Impairment Clause” “Non-Impairment override the “Non-
of the Constitution Clause” of the Impairment Clause”
Constitution because the welfare of
the state is superior to
private contracts
Limitation Constitutionally and Public interest and Public purpose and just
inherently restricted the observance of compensation
due process

SIMILARITIES OF THE THREE POWERS

1. All are inherent powers of the State
2. All are legislative in nature
3. All three powers are necessary attributes of sovereignty
4. They are means by which the State interferes with private rights of persons
5. They exist independently with the Constitution although the condition for their exercise may be
prescribed or limited by the Constitution
6. The exercise of these powers by the local government units may be limited by national legislature
Notes:
• Taxation power can be used as an implement of Police power.
• Police power can be used to raise revenue for the government (ex: license fee)
• If generation of revenue is the primary purpose and regulation is secondary or incidental, the
imposition is a tax. If the regulation is the primary purpose, if the revenue is raised incidentally,
the imposition is not a tax e.g. Collection of universal charge pursuant to EPIRA Law is an
exercise of police power not power of taxation.
NATURE OR CHARACTERISTICS OF THE POWER OF TAXATION
1. It is an attribute of sovereignty
2. It is legislative in character
3. It is subject to international comity or treaty
4. It is subject to constitutional and inherent limitations
5. It is generally payable in money
6. It is territorial
7. It is for public purpose

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SCOPE OF THE POWER OF TAXATION

Taxation is:
1. Comprehensive – it covers practically everything e.g. persons, businesses, activities, etc.
2. Unlimited – in the absence of limitations, the power to tax is unlimited
3. Plenary – it is complete
4. Supreme – as to the selection of the subject/object of taxation
DISCRETION OF THE TAXING POWER (Legislative Branch of Government)
Congress has the power to determine the following:
a. Nature or kind of tax (whether income tax, VAT, or documentary stamp tax, etc.)
b. Object to be taxed (person, property, business, transaction, activity and excisable articles to
be taxed)
c. Purpose of taxation (e.g. imposition of sin tax to discourage use or consumption of sin
products or use of collected tax for the purpose of augmenting hospital budget)
d. Extent (amount or rate of tax)
e. Coverage of those to be taxed (subjects or objects)
f. Apportionment of the tax (general or limited application or setting aside portion for special
use)
g. Situs or place of the imposition
h. Method of collection (e.g. withholding tax system)
LEGISLATION OF TAX LAWS
How a Tax Bill becomes a law:
1. A tax bill (proposal) is filed or introduced by a member of the House of Representatives and a
number is assigned to it.
2. 1st Reading – reading the title, the bill number and the author on the floor and referral to
appropriate committee (Ways and Means Committee).
3. Committee Hearings - The Committee schedules the hearings. The Committee members vote
on the Bill after hearings. If it is rejected, the bill is transferred to the archives. If it is approved,
the Committee Report is submitted to the Plenary for Debates
4. The Committee Report is calendared for 2nd Reading
5. 2nd Reading – debates by the members of the contents of the bills.
6. Voting as a whole will be made after deliberations through yeas and nays (viva voce) or nominal
voting
7. 3rd reading – Final reading of the Bill as approved by the members
8. Transmission to the Senate for concurrence
9. If the Senate has its own version, the Bill goes through the same version (from 1-7)
10. If there are differences in the final bills, the Senate and the House of Representatives appoints
members of the Bicameral Conference Committee to consolidate the Bill. The consolidated bill
is enrolled and transmitted to the President for signature after ratification of the respective
“Houses”. The enrolled bill is the final copy as certified as correct by the Secretary of the Senate
and HOR and duly signed by the Senate President and Speaker of the House of Representatives.
Then proceed to 13.
11. If Senate concurs in whole, the bill is enrolled or the HOR may concur with the Senate version,
in which case, the bill is enrolled. After ratification, the enrolled bill is transmitted to the
President for signature.
12. President’s action:
a. When the president signs it, it becomes a law
b. After 30 days without the President signing it, it lapsed into law 30
Note: The law takes effect after publication in newspaper of general circulation
c. Vetoes the bill and sends it back to the HOR and Senate with veto message
ASPECTS OF TAXATION (PHASES/STAGES/PROCESS)
1. Levy or Imposition – legislative – enactment of law imposing tax

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2. Assessment of tax – administrative (BIR)

3. Collection of the tax – administrative (BIR)

Assessment and collection refer to tax administration. Payment refers to the act of compliance by the
taxpayer.
PRINCIPLES OF A SOUND TAX SYSTEM
1. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public
expenditure
2. Administrative Feasibility- tax laws must be capable of convenient, just and effective administration
Examples:
1. Establishment of Revenue District Offices throughout the Philippines
2. Introduction of electronic Filing (Electronic Filing and Payment System (EFPS) or e-BIR Forms
Package)
3. Accreditation of Authorized Agent Banks (AABs)
4. Substituted Filing of Qualified Compensation Income Earners
5. Payment of tax thru credit/debit/prepaid cards/G-Cash
6. Electronic Tax Payment System (eTPS)/Land Bank Remittance System (LBRS)
3. Theoretical Justice- considers the taxpayers ability to pay (ability-to-pay principle)
LIMITATIONS OF POWER OF TAXATION
A. Inherent Limitations
1. territoriality of taxation
2. international comity or treaty
3. exemption of the government from taxation
4. tax is for public purpose
5. non-delegation of the power of taxation
Exceptions:
a. power to tax was delegated to the President under the Flexibility Clause of the Tariff and
Customs Code (amended by R.A. 10863 or the Customs Modernization and Tariff Act) Note:
Delegated power to executive department is called administrative regulation or subordinate
legislation
b. power to tax was delegated to the local government units thru respective Sanggunian under
the Local Government Code (R.A.7160)

B. Constitutional Limitations
1. observance of due process of law – notice and hearing
2. equal protection of the law –equality among equals
3. uniformity in taxation – taxation of same class
4. progressive scheme of taxation – use of graduated tax table
5. non-imprisonment for non-payment debt or poll tax
6. non-impairment of obligation and contract
7. freedom to exercise religion
8. freedom of the press
9. non-appropriation of public funds or property for the benefit of any church, sect or system of
religion
10. exemption of religious, charitable or educational entities, non-profit cemeteries, churches and
mosque from property taxes
11. exemption from taxes of the revenues and assets of non-profit, non-stock educational
institutions for educational purposes
12. concurrence of a majority of all members of Congress for the passage of a law granting tax
exemption (voting separately)
13. non-impairment of the jurisdiction of the Supreme Court to review tax cases – final arbiter

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14. appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives
but the Senate may propose or concur with amendments
15. each local government unit shall exercise the power to create its own sources of revenue and
shall have a share in the national taxes (Internal Revenue Allotments)
SITUS OF TAXATION
The place of taxation, or jurisdiction, or source of income.

Factors that determine the situs of taxation

1. nature, kind or classification of the tax
2. subject matter of the tax
3. citizenship of the taxpayer
4. residence of the taxpayer
5. sources of income
6. place of exercise, business or occupation being taxed (service)
7. place where income-producing activity was held or done
8. activity

Criteria in Imposing Tax Under Philippine Setting

1. Citizenship Principle (Nationality Theory) – considers the citizenship of taxpayer
2. Residence Principle (Domiciliary Theory) – considers the residence of taxpayer
3. Source Principle (Source of the Income) – considers the source of the income
DOUBLE TAXATION
Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving the
same kind of tax by the same taxing authority

Kinds:
1. Direct Double Taxation/Direct Duplicate/Taxation in Strict Sense –
Elements:
a. Same object/subject (taxpayer)
b. Same type of tax
c. Same purpose
d. Same taxing authority
e. Same period
Note: If one of the elements is missing, then there is Indirect Double Taxation
2. Indirect Double Taxation/Indirect Duplicate/Taxation in Broad Sense –

International Double Taxation –a double taxation caused by two different taxing authorities, one
domestic and one foreign

Forms of Escape from Taxation

1. Evasion – tax dodging – is a scheme used outside of those lawful means and when availed
of, it exposes taxpayers to criminal and administrative liabilities. It refers also to acts and
devices that illegally reduces or totally evade the payment of taxes.
Example:
• Non-registration
• Non-issuance of receipts
• Non-filing of returns and non-payment of tax
• Understatement of sales or income or overstatement of expenses by more than 30%
• Intentional non-declaration of income
• Unjustifiable refusal to pay the tax
2. Shifting –the process of transferring the tax burden from the statutory taxpayer to another

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(e.g. VAT)
3. Capitalization – generally occurs at the time of selling process or exchange or transfer of
land or other assets which generate a flow of income and are subject to a series of
successive annual taxes during their lifetime. Tax capitalization is not common in the
Philippines. Common application is increase in capitalization to avoid payment of
Improperly Accumulated Earnings Tax
4. Avoidance –tax minimization– tax saving device within the means sanctioned by law. It is
the reduction or totally escaping payment of taxes through legally permissible means.
Should be used in good faith and at arm’s length.
5. Transformation – the effective application of organizational design, process improvement,
and enabling technology to improve data integrity, tax function efficiency, and
performance—while driving value for the business (Deloitte). The manufacturer absorbs the
additional taxes imposed by the government without passing it to the buyers for fear of lost
of his market. Instead, it increases quantity of production, thereby turning their units of
production at a lower cost resulting to the transformation of the tax into a gain through the
medium of productions (Banggawan).
6. Exemption- an immunity, privilege or freedom from payment of tax by virtue of law (e.g.
income tax holidays for pioneer/non-pioneer PEZA-enterprises; exemption from tax of
minimum wage earners)

DISTINCTION BETWEEN TAX AMNESTY AND TAX CONDONATION

Tax Amnesty –is a limited time offer by the State to a specified group of taxpayers to pay a defined
amount (certain percentage) in exchange for forgiveness of a tax liability relating to a previous tax
periods as well as freedom from criminal prosecution. It is a general pardon or intentional overlooking
by the state of its authority to impose penalties on persons.

Tax Condonation – means to remit or to desist or refrain from exacting or imposing a tax.
condonation of a tax liability is equivalent to and is in the nature of a tax exemption.

Tax Exemption Tax Amnesty

There is no tax liability at all but a grant of Connotes condonation from payment of
incentive existing tax liability
The grantee generally do not pay anything The grantee pays a portion
Can be availed of by any qualified taxpayer Not always available. Limited-offer only.
STATUTORY CONSTRUCTION AND INTERPRETATION OF TAX LAWS
Taxation
1. If tax laws are clear, there’s no need for interpretation, only application
2. If tax laws are vague, it shall be interpreted strictly against the taxing authority and in liberally in
favor of the taxpayer (statutes levying taxes are construed against the government)

Exemptions/Deductions
3. Exemptions shall be interpreted strictly against the taxpayer and liberally in favor of the taxing
authority
4. Deductions partake the nature of an exemption, hence strictly construed against the taxpayer

Presumption of Regularity
5. Tax assessment are presumed to be correct and done in good faith i.e. disputable presumption only
which can be overcome by evidence)

Application
6. Tax laws are generally prospective in application.

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Exception: If the law so provides (e.g. Tax Amnesty Law)

No compensation or set-off
7. Tax are not subject to compensation or set-off (excess payments can be carried-over and credit on
same tax type, e.g. income tax to income tax and not income tax to VAT. If the excess payment is
converted to Tax Credit Certificate, the taxpayer can use the TCC to pay internal revenue taxes
except withholding taxes (expanded withholding tax (EWT)/Withholding Tax on Compensation
(WTC)/Final Withholding Taxes (FWT or FT)

Others
8. Construction of statute by predecessors is not binding on the successors.
9. Special laws prevail over the general laws (e.g. Bayanihan Laws over Tax Code)

CLASSIFICATION OF TAXES
A. As to authority who imposes the tax
1. National tax – imposed by the National Government. National internal revenue taxes (DIVE-
PESO)
Examples:
a. income taxes
b. value-added tax
c. other percentage taxes
d. estate tax
e. donor’s tax
f. excise tax
g. documentary stamp tax
h. other taxes as may be imposed

2. Local tax – tax imposed by local governments (provincial/city/municipal/barangay)

Examples:
a. real property tax
b. professional tax
c. business taxes, fees and charges
d. community tax

B. As to purpose (P-FRS)
1. Fiscal – general, fiscal or revenue- tax imposed for the general purpose of the government or to
raise revenue for government needs, e.g. income tax, transfer taxes (estate/donor’s
2. Regulatory – for purposes of regulation (exercise of police power), e.g. PRC and driver’s license
3. Special or sumptuary – tax imposed for a special purpose or to achieve some social or economic
ends, e.g. Road User’s Tax / Special Education Fund

C. As to subject matter or object (SM-PPPE)

1. Personal, poll or capitation – tax of a fixed amount imposed on individuals residing within a
specified territory e.g. community tax certificate/cedula
2. Property tax – tax imposed on property, whether real or personal e.g. real property tax / factory
machinery
3. Excise tax – tax on commodities/excisable articles e.g. sin products
(alcohol/cigarettes/automobiles/minerals/jewelries/non-essential services)
4. Privilege tax – tax imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation, e.g. Professional tax (issued PTR)

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D. As to who bears the burden of paying the tax / incidence (I-DI)

1. Direct –
- is one which the taxpayer who pays the tax is directly liable therefor
- the burden of paying the tax falls directly on the person paying the tax
- the tax is demanded from one person who is intended to pay it
Examples: income tax (taxpayer himself to pay), estate tax (estate to pay), donor’s tax (donor to
pay)
2. Indirect –
- one paid by a person who is not directly liable therefor, and who may therefore shift or pass
on the tax to another person or entity, which ultimately assumes the tax burden
- the tax is demanded from one person who can shift the burden of paying the tax to another
person
Example: Value-Added Tax

E. As to determination of amount (ASA)

1. Specific tax – a tax of a fixed amount imposed by the head or number e.g. excise tax on wines or
distilled spirits, cigars
2. Ad valorem – tax is imposed for a fixed proportion of the amount or value of the property to
which the tax is assessed e.g. income tax, transfer taxes (estate and donor’s), VAT

F. As to rate (MR-PP)
1. Proportional or flat rate – the tax is based on a fixed percentage of the amount of the property,
income or other basis to be taxed.
Examples:
a. Preferential Income Tax of 8% for Self-Employed individuals or mixed income earners on
their business/professional income
b. VAT (12%) and percentage taxes.
c. Regular corporate income tax (30%)
d. Under TRAIN: Donor’s tax and Estate tax (6%)
e. Capital gains tax on sale of real property classified as capital asset or creditable
withholding tax on sale of ordinary asset (6%)
f. Capital gains tax on sale of shares of stocks not listed in Stock Exchange (15%)
2. Progressive or graduated tax – the tax rate increases as the tax base increases.
Example: Income tax for individual taxpayers (retained under TRAIN) (did not avail 8%)
3. Regressive tax – the tax the rate of which decreases as the tax base increases. The Philippines
has no regressive tax.
4. Mixed tax- mixture of proportional, progressive or regressive.
Example:
a. Income tax for individuals (progressive/graduated) and for corporation
(proportional/flat)
b. Income tax for Mixed Income Earners who opted 8% on his business income while the
compensation income is subject to graduated tax rate

DISTINCTION OF TAX WITH SIMILAR ITEMS

TAX VS. REVENUE
Tax Revenue
Definition Refers to the amount imposed Refers to the amount collected
Scope Only one of the sources of The product of taxation. It refers
government revenues to the funds derived by the
government whether from tax or
from other sources

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TAX VS. LICENSE

Tax License
Purpose For revenue For regulation
Amount No limit Limited
Time of payment Generally paid after start of Generally paid before the
business commencement of business
Subject/Object of Person, properties, business Required for the
Imposition rights, interests, privilege, acts commencement of a business
and transactions profession
Effect of non- Does not necessarily make the Makes the business illegal
compliance act, business or profession illegal
Revocability Has a nature of permanence Always revocable
Scope The power to tax includes the Power to license does not
power to license include the power to tax
When imposed Post-activity Pre-activity
Basis of imposition Current data Preceding year or quarter date.
If new business, based on
capitalization
Basis/Sources of Power Power of taxation Police power

TAX VS. TOLL

Tax Toll
Definition Enforced contribution Sum of money paid for use of
road or bridge
Basis Demand of sovereignty Demand of ownership
Purpose One’s support for the Compensation for the use of
government somebody else’s property (road
or bridge and the like)
Authority Imposed only by the May be imposed by the
government government or by private
individuals
Amount Based on government needs (no Determined by the cost of the
limit as to the amount of tax) property or improvements
thereon

TAX VS. DEBT

Tax Debt
Basis Law Contract or judgment
Effect of non- Taxpayer may be imprisoned for No imprisonment
compliance non-payment (except for poll tax)
Assignable? No Yes
Mode of settlement Generally payable in money Money, property or service
Subject to Set-off? Generally, not subject to set-off Subject to set-off
Interest Does not earn interest except Draws interest when stipulated
when delinquent or when in default
Authority Imposed by the State Can be imposed by private
individuals
Prescription Provided under the NIRC Provided under the Civil Code

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TAX VS. SPECIAL ASSESSMENT

Tax Special Assessment
Definition Enforced proportional Enforced proportional
contribution from persons or contribution from owners of
properties lands benefited by public
improvements
Subject of the business, interests, transactions, Land only
imposition rights, persons, properties or
privileges
Effect on the person Personal liability of the person Cannot be made the personal
liable or the one owning assessed liability of the person assessed,
the subject because it is the land that
answers for the liability
Basis of Imposition Necessity (with no hope of direct Entirely on benefits received
or immediate benefit to the
taxpayer)
Coverage of application General application Exceptional both as to the time
and place

TAX VS. TARIFF

Tariff refers to a book of rates containing names of merchandises with corresponding duties to be paid
for the same. Tariff refers to the duties payable on goods imported or exported. It is a system or
principle of imposing duties on the importation or exportation of goods.

TAX VS. PENALTY

Tax Penalty
Definition Enforced proportionate Sanction imposed as
contribution punishment for violation of a
law or acts deem injurious
to regulate conduct through
Purpose to raise revenue punishment and suppression of
injurious act
Exercising authority the government the government or by private
individuals
Source Law Law or contract
Mode of settlement in money in money or in kind

Note:
• Payment of tax is compulsory to those who are covered by imposition
• Taxes are important because they are the lifeblood of the government.
• Taxes are personal. The burden of taxation cannot be transferred from one person to the other by
private agreement as this is determined by law
• While the power of taxation includes the power to destroy, it is not absolute. It is subject to
limitation or restrictions.
INCOME TAX SYSTEMS
1. Global Tax System – all incomes regardless of classification e.g. as compensation, business or
professional income, passive income or capital gain, and the deductions are reported in the
income tax return and then the tax computed thereon.
2. Schedular Tax System – different types of income are subject to different sets of income tax
rates (graduated or flat). The basis may be gross income (without deductions) or net income
(gross income less allowable deductions).

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3. Semi-Schedular or Semi-Global Tax System – regular or ordinary income including passive

income and capital gain not subjected to final tax are lumped or added together and after
deducting allowable deductions, the taxable income is subjected to tax in accordance with tax
rules i.e. graduated for individual or flat rate for non-individual. In this case, global system is
applied. For income not subjected to final tax, e.g. if passive income, it is subject to final tax; if
capital gains, it is subject to capital gains tax).
In this system, different returns are filed when reporting the income (e.g. Annual ITR for
ordinary incomes, final tax returns for passive incomes and capital gains tax returns for capital
gains on sale of real properties classified as capital asset and shares of stocks not traded in the
stock exchange. This is adopted in the Philippines.
TAX LAW
Any law that provides for the assessment and collection of taxes for the support of the government
and other public purposes

Sources of Tax Laws:

1. Constitution
2. Statutes and Presidential Decrees
3. Executive Orders and Batas Pambansa
4. Tax Treaties and conventions with foreign countries
5. Revenue Regulations issued by the Department of Finance
6. Supreme Court Decisions
7. Local Ordinances (Sangguniang Panlalawigan/Panglungsod/Bayan/Barangay)
NATURE OF PHILIPPINES TAX LAWS
1. Civil
2. Not Penal
3. Not criminal
MARSHALL VS HOLMES
A. Marshall Doctrine (US Justice John Marshall) – “The power to tax includes the power to destroy”
- Constitutional if taxation power is used validly as an implement of police power in discouraging
certain acts and enterprises inimical to public welfare.
- Unconstitutional if in raising revenue, taxation is allowed to confiscate or destroy properties
B. Holmes Doctrine (US Justice Oliver Wendell Holmes) – “Taxation power is the power to build”, “The
power to tax is not the power to destroy while this court sits”
The power to tax should not be the power to destroy. The power to destroy is merely a
consequence of taxation.
TAX REPORTING VS FINANCIAL REPORTING
Tax Reporting Financial Reporting
Source of Rules Tax Code and other tax laws PRFS, PAS
Basic reportorial requirements Returns and its attachments Audited FS/SMR
Where reported BIR SEC, PEZA, BSP, etc
TAX ACCOUNTING METHODS
A. Cash Basis - A method of accounting whereby all items of gross income received during the year
shall be accounted for such taxable year and that only expenses actually paid for shall be claimed as
deductions during the year.
B. Accrual Basis - A method of accounting for income in the period it is earned regardless of whether
it has been received or not. In the same manner, expenses are accounted for in the period they are
incurred and not in the period they are paid.
C. Completion of Contract Basis - An accounting method applicable to contractors in the construction
of building, installation of equipment and other fixed assets or other construction work covering a
period in excess of one year.
D. Percentage of Completion Basis - A method applicable in the case of a building, installation or

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construction contract covering a period in excess of one year whereby gross income derived from
such contract may be reported upon the basis of percentage of completion.
E. Installment Basis - A method considered appropriate when collections extend over relatively long
periods of time and there is a strong possibility that full collection will not be made. As customers
make installment payments, the seller recognizes the gross profit on sale in proportion to the cash
collected.
F. Crop Year Basis - A method applicable only to farmers engaged in the production of crops which
take more than a year from the time of planting to the process of gathering and disposal. Expenses
paid or incurred are deductible in the year the gross income from the sale of the crops are realized.
Revenue Recognition Expense Recognition
General Rule - The amount of all items of - The deductions shall be
gross income shall be taken for the taxable year
included in the gross in which "paid or accrued"
income for the taxable year or "paid or incurred",
in which received by the dependent upon the
taxpayer method of accounting the
basis of which the net
income is computed

Exception: - Under methods of - In order to clearly reflect

accounting permitted the income, the deductions
under the Tax Code (see A- should be taken as of a
F above) different period.

Accounting for Long- Gross income derived in whole All expenditures made during
Term Contracts or in part from such contracts the taxable year on account of
shall report such income upon the contract, account being
the basis of percentage of taken of the material and
completion. The return should supplies on hand at the
be accompanied by a return beginning and end of the
certificate of architects or taxable period for use in
engineers showing the connection with the work
percentage of completion under the contract but not yet
during the taxable year of the so applied.
entire work performed under Note: If upon completion of a
contract. contract, it is found that the
‘Long-term contracts' means taxable net income arising
building, installation or thereunder has not been
construction contracts clearly reflected for any year or
covering a period in excess of years, the Commissioner may
one (1) year. permit or require an amended
return.
Installment Basis – A person who regularly sells or
Sales of Dealers in otherwise disposes of personal
Personal Property property on the installment
(Section 49) plan may return as income
therefrom in any taxable year
that proportion of the
installment payments actually
received in that year, which the
gross profit realized or to be

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realized when payment is

completed, bears to the total
contract price.

Installment Basis – In the case (1) of a casual sale

Casual Sales of or other casual disposition of
Personality personal property (other than
property of a kind which would
properly be included in the
inventory of the taxpayer if on
hand at the close of the taxable
year), for a price exceeding
One thousand pesos (P1,000),

or

Sales of Realty (2) of a sale or other

disposition of real property, if
in either case the initial
payments do not exceed
twenty-five percent (25%) of
the selling price

the income may be returned

on the basis and in the manner
above prescribed in this
Section (49). See above

“Initial payments" means the

payments received in cash or
property other than evidences
of indebtedness of the
purchaser during the taxable
period in which the sale or
other disposition is made.

TAX ACCOUNTING PERIODS

General Rule: The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (i.e. fiscal year or calendar year, as the case may be) in accordance with the method
of accounting regularly employed in keeping the books of such taxpayer
Exception: the taxable income shall be computed on the basis of the calendar year under specific
circumstances.
Section 43

Taxable year can be calendar or fiscal year

1. Calendar year – the 12-month period ending December 31 and is applicable to:
a. If no such method of accounting has been so employed
b. If the method employed does not clearly reflect the income, the computation shall be made in
accordance with such method as in the opinion of the Commissioner clearly reflects the income
c. If the taxpayer's annual accounting period is other than a fiscal year
d. If the taxpayer has no annual accounting period

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e. If the taxpayer does not keep books

f. If the taxpayer is an individual
2. Fiscal period – any 12 months period ending the last day of any month other than December 31st.

Change of Accounting Method

Prior BIR approval is required

Short accounting period may arise in the following cases:

1. death of a taxpayer
2. newly organized business
3. dissolution of a business
4. change in accounting period
TAX ADMINISTRATION
The Bureau of Internal Revenue
The Bureau of Internal Revenue is tasked with tax administration function of the government and is
under the supervision and control of the Department of Finance.

Chief Officials of the Bureau (E.O. 366)

1. 1 chief officer: The Commissioner of Internal Revenue
2. 4 assistant chiefs: LINE Deputy Commissioner
a. Operations Group
b. Legal Group
c. Information Systems Group
d. Resource Management Group
Note: The CIR and Line Deputy Commissioners are members of the National Evaluation Board (NEB)
which handles applications for compromise settlement.
POWERS OF THE BUREAU OF INTERNAL REVENUE
1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties, and fines and judgments in all cases decided in its favor by
the courts
3. Give effect to and administer the supervisory and police powers conferred to it by the NIRC and or
other laws
BIR ISSUANCES
1. Revenue Regulations (RRs) – specify, prescribe or define rules and regulations for the effective
enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.
2. Revenue Memorandum Orders (RMOs) – are issuances that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans and
programs of the Bureau in all areas of operations, except auditing (BIR internal rules).
3. Revenue Memorandum Circulars (RMCs) – are issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and
other agencies/offices
4. Revenue Administrative Orders (RAOs) -are issuances that cover subject matters dealing strictly with
the permanent administrative set-up of the Bureau, more specifically, the organizational structure,
statements of functions and/or responsibilities of BIR offices, definitions and delegations of
authority, staffing and personnel requirements and standards of performance
5. Revenue Delegation of Authority Orders (RDAOs) – refer to functions delegated by the
Commissioner to revenue officials in accordance with law.
6. Revenue Rulings (Rulings) - are requests of taxpayers on taxability of certain matters or transactions.
POWERS OF THE COMMISSIONER OF INTERNAL REVENUE
1. To interpret the provisions of the NIRC subject to review by the Secretary of Finance (exercised thru

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the issuance of Revenue Rulings or Revenue Memorandum Circulars)

2. To decide disputed tax assessments thru the issuance of Final Decision of Disputed Assessments
(FDDA) / Denial on Requests for Reconsiderations
3. To refund internal revenue taxes, fees or other charges, penalties imposed in relation thereto
4. To decide on other matters arising under the NIRCS or other laws or portions thereof
Note: Items 2, 3 and 4 are subject to the exclusive appellate jurisdiction of the Court of Tax Appeals
5. To obtain information from any person
Note: CIR’s Power to Obtain Information/Accountant-Client Privilege
General Rule: Communication of Accountant (Lawyer)-Client is privileged
Exceptions:
a. When required by law to reveal the confidence or secrets
b. In contemplation of crime or perpetration of fraud
c. If through a subpoena
d. There is legal right or duty to disclose information
e. Lifeblood doctrine
6. Power to summon
a. Subpoena duces tecum (SDT) – compels the taxpayer to produce the documents
b. Subpoena ad testificandum – compel the taxpayer to produce documents and provide
testimony why there is a failure to comply with the request to produce
7. Power to examine returns (when the BIR makes the audit, it issues notice of audit):
a. Electronic Letter of Authority (e-LOA) – formal document authorizing Revenue Officers
(Assessment) to examine taxpayer records.
b. Tax Verfication Notice (TVN) – BIR authority to audit taxpayer records but is lower than eLOA
c. Letter Notice (LN) – third party information. Result of computerized matching of income and
expense. Not equivalent to eLOA or TVN but has the effect of barring taxpayer to amend return.
If issued, the LN if protested must be converted to eLOA
Note: If taxpayer is served with notice of audit, taxpayer is barred from amending returns
8. Power to take testimony of persons concerned under oath as may be relevant and material to such
inquiry
9. To cause revenue officers and employees to make a canvass from time to time of any revenue
district or region concerning taxpayers.
10. To make assessment and prescribe additional requirement
a. To examine returns and determine correct amount of tax due
b. To assess based on best evidence obtainable
Note: The BIR can issue assessment GR: 3 years from date of filing or deadline whichever is
later, Exception: 10 years if there is fraud reckoned from date of discovery). If already
elapsed, the right of the BIR to assess has prescribed)
11. To make or amend a return for and in behalf of a taxpayer; or to disregard one filed by the taxpayer
12. To conduct inventory-stock taking or surveillance (BIR to issue Mission Orders (MOs)
a. Covert surveillance – secret/posing as taxpayer/not known initially by taxpayer
b. Overt surveillance – known to the taxpayer
Note: The BIR also issues MO during tax mapping operations or Tax Compliance Verification Drive
(TCVD)
13. To prescribe presumptive gross sales or receipts (Benchmarking)
14. To change tax accounting period
15. To terminate taxable period
a. Taxpayer is retiring from business
b. Taxpayer intends to leave the Philippines
c. Taxpayer is removing, hiding or concealing his property
d. Taxpayer is performing any act tending to obstruct the proceedings from the collection of
the tax

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16. To prescribe real estate values (zonal valuation)

The CIR is authorized to divide the Philippines into zones or areas and determine the fair market
value of the real properties located in each zones or area.
TRAIN: In exercising this authority, the following shall be observed:
a. Mandatory consultation with both private and public competent appraisers before division of
the Philippines into zones.
b. Prior notice to affected taxpayers before the determination of fair market values of the real
properties.
c. Publication or posting of adjustments in zonal value in a newspaper of general circulation in the
province, city or municipality concerned.
d. The basis of valuation and records of consultation shall be public records open to the inquiry of
any taxpayer.
e. Zonal valuations shall be automatically adjusted once every three years.
17. To inquire into bank deposits under the following cases:
a. Estate tax purposes to determine gross estate
b. Application of compromise settlement based on financial incapacity
18. To accredit tax agents
19. To prescribe additional procedures or documentary requirements
20. To enter into a compromise of tax liabilities of taxpayers
a. Doubtful validity – 40% of basic tax (the rate may be lower but with prior approval by the
CIR)
b. Financial incapacity – 10% of basic tax (with required documentary requirements)
21. To abate or cancel tax liabilities:
a. Unjustly or excessively assessed (arbitrary, capricious and whimsical)
b. Cost of collection is higher than the amount to be collected (cost-benefit principle)
22. To close business establishments (Oplan Kandado; Ran After Tax Evaders (RATE)
23. To allocate income and deductions (application of transfer pricing)
In the case of two or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner is authorized to distribute, apportion or allocate gross income or
deductions between or among such organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly
to reflect the income of any such organization, trade or business.
24. To delegate his powers to any subordinate officer with rank equivalent to a division chief of an
office

POWERS OF THE CIR THAT CANNOT BE DELEGATED

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of
the Bureau.
3. The power to compromise or abate any tax liability
Exceptions: Compromise by Regional Evaluation Boards under the following requisites:
a. assessments are issued by the regional offices involving basic deficiency tax of P500,000.00, and
b. involves minor criminal violations as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the CIR, discovered by
regional and district officials
4. The power to assign and reassign internal revenue officers to establishment where articles subject
to excise tax are produced or kept. Revenue officers assigned to any such establishments shall in no
case stay in his assignment for more than 2 years.

Rules in assignments to other duties

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Revenue officers assigned to perform assessment and collection function shall not remain 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.

Agents and Deputies for Collection of National 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 the made thru banks.
END

Reference: National Internal Revenue Code of 1997

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