TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration

Lesson Outcome: At the end of this lesson, students will be able to:
• Define the significance of taxation.
• Identify the inherent and constitutional limitations of Power of Taxation.
• Enumerate the ways to minimize the impact of Taxation.
• Define and differentiate Taxes, Tax Laws and Tax Administration.

Taxation – may be defined as a state power, a legislative process, and a mode of government cost distribution.
1. State Power – taxation is an inherent power of the state to enforce a proportional contribution from its
subjects for public purpose.
2. A Legislative Process – taxation is a process of levying taxes by the legislature of the State to enforce
proportional contributions from its subjects for public purpose.
3. A Mode of Cost Distribution – taxation is a mode by which the State allocates its costs or burden to its
subjects who are benefited by its spending.
Theory of Taxation – the government’s necessity for funding.
Basis of Taxation – the mutuality of support between the people and the government.

Public Services

Government People

Taxes

Theories of Cost Allocation

 Benefit Received Theory – The benefit received theory presupposes that the more benefit one receives from
the government, the more taxes he should pay.
 Ability to Pay Theory – The ability to pay theory presupposes that taxation should also consider the
taxpayer's ability to pay. Taxpayers should be required to contribute based on their relative capacity to
sacrifice for the support of the government.
In short, those who have more should be taxed more even if they benefit less from the government. Those
who have less shall contribute less even if they receive more of the benefits from the government.

Aspects of the Ability to Pay Theory

1. Vertical Equity – proposes that the extent of one's ability to pay is directly proportional to the level of his tax
base.
For example, A has P200,000 income while B has P400,000. In taxing income, the government should tax
B more than A because B has greater income; hence, a greater capacity to contribute.
2. Horizontal Equity - requires consideration of the particular circumstance of the taxpayer.
For example, Businessmen A and B both have P300,000 income. A incurred P200,000 in business
expenses while B incurred only P50,000 business expenses. The government should tax B more than A because
he has lesser expenses and thus greater capacity to contribute taxes.

Vertical equity is a gross concept while horizontal equity is a net concept.

The Lifeblood Doctrine
Taxes are essential and indispensable to the continued subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive power to activate or operate it. (CIR vs. Algue)
Taxes are the lifeblood of the government, and their prompt and certain availability are an imperious
need. Upon taxation depends the government's ability to serve the people for whose benefit taxes are collected.
(Vera vs. Fernandez)

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration

Implication of the lifeblood doctrine in taxation:

1. Tax is imposed even in the absence of a Constitutional grant.
2. Claims for tax exemption are construed against taxpayers.
3. The government reserves the right to choose the objects of taxation.
4. The courts are not allowed to interfere with the collection of taxes.
5. In income taxation:
a. Income received in advance is taxable upon receipt.
b. Deduction for capital expenditures and prepayments is not allowed as it effectively defers the
collection of income tax.
c. A lower amount of deduction is preferred when a claimable expense is subject to limit.
d. A higher tax base is preferred when the tax object has multiple tax bases.

INHERENT POWERS OF THE STATE

A government has its basic needs and rights which co-exist with its creation. It has rights to sustenance,
protection, and properties. The government sustains itself by the power of taxation, secures itself and the
wellbeing of its people by police power, and secures its own properties to carry out its public services by the
power of eminent domain.
These rights, dubbed as "powers" are natural, inseparable, and inherent to every government. No
government can sustain or effectively operate without these powers. Therefore, the exercise of these powers by
the government is presumed understood and acknowledged by the people from the very moment they establish
their government. These powers are naturally exercisable by the government even in the absence of an express
grant of power in the Constitution.

The Inherent Powers of the State

1. Taxation Power – is the power of the State to enforce proportional contribution from its subjects to
sustain itself.
2. Police Power – is the general power of the State to enact laws to protect the well-being of the people.
3. Eminent Domain – is the power of the State to take private property for public use after paying just
compensation.

Comparison of Three Powers of the State

Point of Difference Taxation Police Power Eminent Domain
Government or Public
Exercising Authority Government Government
Service/Utility Company
For the support of the To protect the general
Purpose For Public Use
government welfare of the people
Community or class of Community or class of
Persons Affected Owner of the Property
individuals individuals
Unlimited (tax is based Limited (imposition is No amount imposed (the
Amount of Imposition on the government limited to cover cost of government pays just
needs) regulation) compensation)
Importance Most important Most superior Important

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
Inferior to the “Non- Superior to the “Non- Superior to the “Non-
Relationship with the
Impairment Clause) of Impairment Clause) of the Impairment Clause) of the
Constitution
the constitution constitution constitution
Constitutional and Public Interest and Due Public Purpose and Just
Limitation
Inherent Limitation Process Compensation

Similarities of the three powers of the State

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

SCOPE OF THE TAXATION POWER

 Comprehensive
 Unlimited
 Plenary
 Supreme
However, unlimited. despite Taxation the has seemingly its own inherent unlimited limitations nature of taxation,
and limitations it is not imposed absolutely by the Constitution.

THE LIMITATIONS OF THE TAXATION POWER

Inherent limitations
1. Territoriality of taxation
2. International comity
3. Public purpose
4. Exemption of the government
5. Non-delegation of the taxing power
Constitutional Limitations
1. Due process of law
2. Equal protection of the law
3. Uniformity rule in taxation
4. Progressive system of taxation
5. Non-imprisonment for non-payment of debt or poll tax
6. Non-impairment of obligation and contract
7. Free worship rule
8. Exemption of religious or charitable entities, non-profit cemeteries, churches and mosque from property
taxes
9. Non-appropriation of public funds or property for the benefit of any church, sect or system of religion
10. Exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
11. Concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
12. Non-diversification of tax collections
13. Non-delegation of the power of taxation
14. Non-impairment cases of the jurisdiction of the Supreme Court to review tax

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
15. The requirement that appropriations, revenue, or tariff bills shall originate exclusively in the House of
Representatives
16. The delegation of taxing power to local government units

STAGES OF THE EXERCISE OF TAXATION POWER

1. Levy or Imposition
2. Assessment and Collection

Levy or Imposition
This process involves the enactment of a tax law by Congress and is called impact of taxation. It is also
referred to as the legislative act in taxation.

Congress is composed of two bodies:

 The House of Representatives, and
 The Senate
As mandated by the Constitution, tax bills must originate from the House of Representatives. Each may,
however, have their own versions of a proposed law which is approved by both bodies, but tax bills cannot
originate exclusively from the Senate.

Matters of legislative discretion in the exercise of taxation

1. Determining the object of taxation
2. Setting the tax rate or amount to be collected
3. Determining the purpose for the levy which must be public use
4. Kind of tax to be imposed
5. Apportionment of the tax between the national and local government
6. Situs of taxation
7. Method of collection
Assessment and Collection
The tax law is implemented by the administrative branch of the government. Implementation involves
assessment or the determination of the tax liabilities of taxpayers and collection. This stage is referred to as
incidence of taxation or the administrative act of taxation.

SITUS OF TAXATION
Situs is the place of taxation. It is the tax jurisdiction that has the power to levy taxes upon the tax object.
Situs rules serve as frames of reference in gauging whether the tax object is within or outside the tax jurisdiction
of the taxing authority.

Examples of Situs Rules:

1. Business Tax Situs: Businesses are subject to tax in the place where the business is conducted.
Illustration: A taxpayer is involved in car dealership
abroad and restaurant operation in the Philippines. The
restaurant business will be subject to business tax in the
Philippines since the business is conducted herein, but
the car dealing business is exempt because the business
is conducted abroad.
2. Income Tax Situs on Services: Service fees are subject to tax where they are rendered.

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
Illustration: A foreign corporation leases a residential
space to a non-resident Filipino citizen abroad. The rent
income will be exempt from Philippine taxation as the
leasing service is rendered abroad.
3. Income Tax Situs on Sale of Goods: The gain on sale is subject to tax in the place of sale.
Illustration: While in China, a non-resident OFW citizen
agreed with a Chinese friend to sell his diamond
necklace to the latter. They stipulated that the delivery
of the item and the payment will be made a week later
in the Philippines. The sale was consummated as
agreed. The contract of sale is consensual and is
perfected by the meeting of the minds of the contracting
parties. The perfection of the contract of sale is in
China. The situs of taxation is China. The gain on the
sale of the necklace will be taxable abroad and exempt
in the Philippines.
4. Property Tax Situs: Properties are taxable in their location.
Illustration: An overseas Filipino worker has a
residential lot in the Philippines. He will still pay real
property tax despite his absence in the Philippines
because his property is located herein.
5. Personal Tax Situs: Persons are taxable in their place of residence.
Illustration: Ahmed Lofti is a Sudanese studying
medicine in the Philippines. Ahmed will pay personal
tax in the Philippines even if he is an alien because he is
residing in the Philippines.

DOUBLE TAXATION
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction for the same
thing.

Elements of Double Taxation

1. Primary Element: Same object
2. Secondary Elements:
a. Same type of tax c. Same taxing jurisdiction
b. Same purpose of tax d. Same tax period
Types of Double Taxation
1. Direct Double Taxation – This occurs when all the element of double taxation exists for both
impositions.
Examples: An income tax of 10% on monthly sales and a 2% income tax on the annual sales
(total of monthly sales) A 5% tax on bank reserve deficiency and another 1% penalty per day as a
consequence of such reserve deficiency.
2. Indirect Double Taxation – This occurs when at least one of the secondary elements of double taxation is
not common for both impositions.
Examples:
a. The national government levies business tax on the sales or gross receipts of business while the
local government levies business tax upon the same sales or receipts.
b. The national government collects income tax from a taxpayer on his income while the local
government collects community tax upon the same income.

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
c. The Philippine government taxes foreign income of domestic corporations and resident citizens
while a foreign government also taxes the same income (international double taxation).

Nothing in our law expressly prohibits double taxation. In fact, indirect double taxation is prevalent in
practice. However, direct double taxation is discouraged because it is oppressive and burdensome to taxpayers. It
is also believed to counter the rule of equal protection and uniformity in the Constitution.

How can double taxation be minimized?

The impact of double taxation can be minimized by any one or a combination of the following:
a. Provision of Tax Exemption – only one tax law is allowed to apply to the tax object while the other tax
law exempts the same tax object.
b. Allowing Foreign Tax Credit – both tax laws of the domestic country and a foreign country tax the tax
object, but the tax payments made in the foreign tax law are deductible against the tax due of the domestic
tax law.
c. Allowing Reciprocal Tax Treatment – provisions in tax laws imposing a reduced tax rates or even
exemption if the country of the foreign taxpayer also gives the same treatment to Filipino non-residents
therein.
d. Entering into Treaties or Bilateral Agreements – countries may stipulate for a lower tax rate for their
residents if they engage in transactions that are taxable by both of them.

ESCAPES FROM TAXATION

Escapes from taxation are the means available to the taxpayer to limit or even avoid the impact of
taxation.

Categories of Escapes from Taxation

A. Those that result to loss of government revenue
1. Tax Evasion also known as “tax dodging”, refers to any act or trick that tends to illegally reduce or
avoid the payment of tax.
Examples:
a. This can be achieved by gross understatement of income, non-declaration of income,
overstatement of expenses or tax credit.
b. Misrepresenting the nature or amount of transaction to take advantage of lower taxes.
2. Tax Avoidance also known as “tax minimization”, refers to any act or trick that reduces or totally
escapes taxes by any legally permissible means.
Examples:
a. Selection and execution of transaction that would expose taxpayer to lower taxes.
b. Maximizing tax options, tax carry-overs or tax credits
c. Careful tax planning
3. Tax Exemption also known as “tax holiday”, refers to the immunity, privilege or freedom from being
subject to tax which others are subject to. Tax exemptions may be granted by the Constitution, law, or
contract.

All forms of tax exemptions can be revoked by Congress except those granted by the Constitution and those
granted under contracts.

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration

B. Those that do not result to loss of government revenue

1. Shifting - This is the process of transferring tax burden to other taxpayers.
a. Forward Shifting – This is the shifting of tax which follows the normal flow of distribution (i.e.
from manufacturer to wholesalers, retailers to consumers). Forward shifting is common with
essential commodities and services such as food and fuel.
b. Backward Shifting – This is the reverse of forward shifting. Backward shifting is common with
nonessential commodities where buyers have considerable market power and commodities with
numerous substitute products.
c. Onward shifting – This refers to any tax shifting in the distribution channel that exhibits forward
shifting or backward shifting.
Shifting is common with business taxes where taxes imposed on business revenue can be shifted or
passed-on to customers.
2. Capitalization – This pertains to the adjustment of the value of an asset caused by changes in tax rates.
For instance, the value of a mining property will correspondingly decrease when mining output is
subjected to higher taxes. This is a form of backward shifting of tax.
3. Transformation – This pertains to the elimination of wastes or losses by the taxpayer to form savings to
compensate for the tax imposition or increase in taxes.

Tax Amnesty
Amnesty is a general pardon granted by the government for erring taxpayers to give them a chance to
reform and enable them to have a fresh start to be part of a society with a clean slate. It is an absolute forgiveness
or waiver by the government on its right to collect and is retrospective in application.
Tax Condonation
Tax condonation is forgiveness of the tax obligation of a certain taxpayer under certain justifiable
grounds. This is also referred to as “tax remission”.
Because they deprive the government of revenues, tax exemption, tax refund, tax amnesty, and tax
condonation are construed against the taxpayer and in favor of the government.

Tax Amnesty vs. Tax Condonation

Amnesty covers both civil and criminal liabilities, but condonation covers only civil liabilities of the
taxpayer.
Amnesty operates retrospectively by forgiving past violations. Condonation applies prospectively to any
unpaid balance of the tax; hence, the portion already paid by the taxpayer will not be refunded.
Amnesty is also conditional upon the taxpayer paying the government a portion of the tax whereas
condonation requires no payment.

TAXATION LAW
Taxation law refers to any law that arises from the exercise of the taxation power of the State.

Types of Taxation Laws

1. Tax Laws – These are laws that provide for the assessment and collection taxes. Examples:
a. The National Internal Revenue Code (NIRC)
b. The Tari and Customs Code
c. The Local Tax Code
d. The Real Property Tax Code
2. Tax Exemption Laws – These are laws that grant certain immunity from taxation. Examples:
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)

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c. Barangay Micro-Business Enterprise (BMBE) Law
d. Cooperative Development Act

Sources of Taxation Laws

1. Constitution
2. Statutes and Presidential Decrees
3. Judicial Decisions or case laws
4. Executive Orders and Batas Pambansa
5. Administrative Issuance
6. Local Ordinances
7. Tax Treaties and Conventions with foreign countries
8. 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. BIR Rulings.

Types of Rulings
1. Value Added Tax (VAT) Rulings
2. Internal Tax Affairs Division (ITAD) Rulings
3. BIR Rulings
4. Delegated Authority (DA) Rulings

TAX is an enforced proportional contribution levied by the lawmaking body of the state to raise funds for public
purpose.

Elements of a Valid Tax

1. Tax must be levied by the taxing power having jurisdiction over the object of taxation.
2. Tax must not violate Constitutional and inherent limitations.
3. Tax must be uniform and equitable.
4. Tax must be for public purpose.
5. Tax must be proportional in character.
6. Tax is generally payable in money.

Classification of Taxes
 As to Purpose
1. Fiscal or revenue tax – a tax imposed for general purpose.
2. Regulatory – a tax imposed to regulate business, conduct, acts or Transactions.
3. Sumptuary – a tax levied to achieve some social or economic objectives.
 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.

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
3. Excise or privilege tax – a tax imposed upon the performance of an act, enjoyment of a privilege or
engagement in an occupation.
 As to Incidence
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 tax is 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 is the one who actually pays the tax.

 As to Amount
1. Specific tax – a tax of a fixed amount imposed on a per unit basis such as per kilo, liter or meter, etc.
2. Ad valorem – a tax of a fixed proportion imposed upon the value of the tax object.
 As to Rate
1. Proportional tax – This is a flat or fixed rate tax. The use of proportional tax emphasizes equality as
it subjects all taxpayers with the same rate without regard to their ability to pay.
2. Progressive or graduated tax – This is a tax which imposes increasing rates as the tax base increase.
The use of progressive tax rates results in equitable taxation because it gets more tax to those who are
more capable. It aids in lessening the gap between the rich and the poor.
3. 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.
4. Mixed tax – This tax manifest tax rates which is a combination of any of the above types of tax.
 As to Imposing Authority
1. 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
c. Donor's tax – tax on gratuitous transfer of properties by a living donor
d. Value Added Tax – consumption tax collected by VAT business taxpayers.
e. Other percentage tax - consumption tax collected by non-VAT business taxpayers.
f. Excise tax – tax on sin products and non-essential commodities such as alcohol, cigarettes and
metallic minerals. This should be differentiated with the privilege tax which is also called excise
tax.
g. Documentary stamp tax – a tax on documents, instruments, loan agreements, and papers
evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident
thereto.
2. Local Tax - tax imposed by the municipal or local government.
Examples:
a. Real property tax
b. Professional tax
c. Business taxes, fees, and charges
d. Community tax
e. Tax on Banks and other financial institutions.

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration
DISTINCTION OF TAXES WITH SIMILAR ITEMS
Tax vs. Revenue
Tax refers to the amount imposed by the government for public purpose.
Revenue refers to all income collections of the government which includes taxes, licenses, toll, penalties and
others.
The amount imposed is tax but the amount collected is revenue.

Tax vs. License Fee

Tax has a broader subject than license.
Tax emanates from taxation power and is imposed upon any object such as persons, properties, or privileges to
raise revenue.
License fee emanates from police power and is imposed to regulate the exercise of a privilege such as the
commencement of a business or a 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 a 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 nonpayment of debt does not lead to imprisonment.
Debt can be subject to set-off, but tax is not.
Debt can be paid in kind (“dacion en pago”) but tax is generally payable in money.
Tax draws interest only when the taxpayer is delinquent. Debt draws interest when it is so stipulated by
the contracting parties or when the debtor incurs a legal delay.

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. 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
nonpayment of taxes).

Tax vs. Tariff

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

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TAX01 – Lesson01: Introduction to Taxation, Tax Laws and Tax Administration

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 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

a) Progressive – employed in the taxation of income of individuals, and certain local business taxes.
b) Proportional – employed in taxation of corporate income and business.
c) Regressive – not employed in the Philippines.

Types of Tax System According to Impact

1. 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.
2. 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.

TAX COLLECTION SYSTEMS

A. Withholding System on Income Tax
Under this collection system, the payor of the income withholds or deducts the tax on the income before
releasing the same to the payee and remits the same to the government. The following are the withholding
taxes collected under this system:
1. Creditable withholding tax
a) Withholding tax on compensation – an estimated tax required by the government to be withheld
(i.e. deducted) by employers against the compensation income to their employees.
b) Expanded withholding tax – an estimated tax required by the government to be deducted on certain
income payments made by taxpayers engaged in business.
The creditable withholding tax is intended to support the self-assessment method to lessen the
burden of lump sum tax payment of taxpayer and also provides for a possible third-party check
for the BIR of noncompliant 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
noncompliance.

Similarities of final tax and creditable withholding tax

a. In both cases, the income payor withholds a fraction of the income and remits the same to the
government.
b. By collecting at the moment cash is available, both serve to minimize cash flow problems to the tax payer
and collection problems to the government.

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Differences between FWT and CWT
Point of Difference Final Withholding Tax Creditable Withholding Tax
Income tax withheld Full Only portion
Coverage of withholding Certain passive income Certain passive and active income
Income payor for CWT and the taxpayer for
Who remits the actual tax Income payor
the balance
Necessity of income tax return for
Not required Required
taxpayer
B. Withholding System on Business Tax
When the national government agencies and instrumentalities including government-owned and controlled
corporations (GOCCs) purchase goods or services from private suppliers, the law requires withholding of the
relevant business tax (i.e. VAT or percentage tax).
C. Voluntary Compliance System
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:
a) Fiscal Adequacy
b) Administrative Feasibility
c) Theoretical Justice

Fiscal Adequacy
Fiscal adequacy requires that the sources of the government fund must be sufficient to cover government costs.
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.
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 of the principle of administrative feasibility:

a) E-filing and e-payment of taxes.
b) Substituted filing system for employees.
c) Final withholding tax on non-resident aliens or corporations.
d) Accreditation of authorized agent banks for the filing and payment of taxes

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Theoretical Justice
Theoretical justice or equity suggests that taxation should consider the taxpayer ability to pay. It also suggests that
exercise of taxation should not oppressive, unjust, or confiscatory.

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

1. 1 Commissioner
2. 4 Deputy Commissioners, each to be designated to the following:
a) Operations Group
b) Legal Enforcement group
c) Information Systems Group
d) Resource Management Group

POWERS OF THE BUREAU OF INTERNALREVENUE

1. Assessment and collection of taxes.
2. Enforcement decided in its of favor all forfeitures, penalties and fines, and judgements 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 o icers and other employees to other duties.
5. Provision and distribution of forms, receipts, certificates, stamps, etc. to proper officials.
6. Issuance of receipts and clearances.
7. Submission of annual report, pertinent information to Congress and reports to the Congressional
Oversight Committee in matters of taxation.

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